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    Tutorial 1

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    charlisyuen
    Mr. Baffled, the managing director of Confused plc, wants to use the internal rate of return (IRR) method to evaluate two new projects, Project C and Project D. The document shows the cash flows for each project over three years and calculates the IRR for each project. Project C has an IRR of 12.11% while the IRR cannot be calculated for Project D due to its non-conventional cash flows. The document advises Mr. Baffled to accept Project C since it has a positive net present value of $646 at their discount rate of 25%, but does not recommend Project D due to its negative NPV of $200.

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    Tutorial 1

    Uploaded by

    charlisyuen
    15 views5 pages
    Mr. Baffled, the managing director of Confused plc, wants to use the internal rate of return (IRR) method to evaluate two new projects, Project C and Project D. The document shows the cash flows for each project over three years and calculates the IRR for each project. Project C has an IRR of 12.11% while the IRR cannot be calculated for Project D due to its non-conventional cash flows. The document advises Mr. Baffled to accept Project C since it has a positive net present value of $646 at their discount rate of 25%, but does not recommend Project D due to its negative NPV of $200.

    Original Description:

    project appraisal: npv and irr

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    Mr. Baffled, the managing director of Confused plc, wants to use the internal rate of return (IRR) method to evaluate two new projects, Project C and Project D. The document shows the cash flows for each project over three years and calculates the IRR for each project. Project C has an IRR of 12.11% while the IRR cannot be calculated for Project D due to its non-conventional cash flows. The document advises Mr. Baffled to accept Project C since it has a positive net present value of $646 at their discount rate of 25%, but does not recommend Project D due to its negative NPV of $200.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as pptx, pdf, or txt
    15 views5 pages

    Tutorial 1

    Uploaded by

    charlisyuen
    Mr. Baffled, the managing director of Confused plc, wants to use the internal rate of return (IRR) method to evaluate two new projects, Project C and Project D. The document shows the cash flows for each project over three years and calculates the IRR for each project. Project C has an IRR of 12.11% while the IRR cannot be calculated for Project D due to its non-conventional cash flows. The document advises Mr. Baffled to accept Project C since it has a positive net present value of $646 at their discount rate of 25%, but does not recommend Project D due to its negative NPV of $200.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as pptx, pdf, or txt
    of 5

    Question 3

    Mr Baffled, the managing director of Confused


    plc, has heard that the internal rate of return
    (IRR) method of investment appraisal is the best
    modern approach. He is trying to apply the IRR
    method to two new projects.
    Year

    Project C

    Project D

    -3,000

    -3,000

    +14,950

    +7,500

    -12,990

    -5,000

    a) Calculate the IRR of each projects.


    Project C
    12%, -3,000+(14,950/(1+0.12))+(-12,990/(1+0.12)^2)
    = -7.34
    13%, -3,000+(14.950/(1+0.13))+(-12,990/(1+0.13)^2)
    = 57
    IRR= 12+(7.34/(7.24+57)x(13-12))= 12.11%
    *-3,000+(14,950/(1+0.121))+(-12,990/(1+0.121)^2)
    = 0 (result)

    Project D
    31%, -3,000+(7,500/(1+0.31))+(-5,000/(1+0.31)^2)
    = -188.41
    34%, -3,000+(7,500/(1+0.34))+(-5,000/(1+0.34)^2)
    = -187.6
    36%, -3,000+(7,500/(1+0.36))+(-5,000/(1+0.36)^2)
    = -188.59

    b) Explain why Mr Baffled is having


    difficulties with the IRR method.
    Non conventional cash flow cause problem.

    c) Advise Confused whether to accept either or


    both projects. (Assume a discount rate of 25
    percent)
    Project C
    -3,000+(14950/(1+0.25)+(-12,990/(1+0.25)^2)
    = 646
    Project D
    -3,000+(7,500/(1+0.25))+(-5,000/(1+0.25)^2)
    = -200
    Accept project C since NPV >0

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