Your company, which has a marr of 12%, is considering the following two investment alternatives:
- project a project b
initial capital investment $40,000 $60,000
revenues $15,000 per year, $24,000 per year
starting in year 3 starting in year 4
expenses $3,000 per year $3,000 per year
salvage value $4,000 $9,000
project life 10 years 10 years
a) find the future worth of project a and project b.
b) determine which project, if any, your company should choose.
c) find the irr of project a.

future worth:

project A  11,615.26

project B  12,139.18‬

It should choose project B as their future value is greater

IRR of project A: 13.54%

We should remember that the IRR is the rate at which the net value is zero thus, equals the inflow with the cash outlay

It is calculate with excel or financial calculator due to the complex of the formula.

Explanation:

Project A

We calculate the future value of the cash flow per year and cost as we are asked for future value. The salvage value is already at the end of the project life so we don't adjust it.

Revenues future value

C15,000

time8

rate0.12

FV$184,495.3970  

Expenses future value

C3,000

time10

rate0.12

FV$52,646.2052  

Cost future value

Principal40,000.00

time10.00

rate0.12000

Amount124,233.93

Net future worth:

-124,233.93 cost - 52,646.21 expenses + 184,495.40 revenues + 4,000 salvage value

future worth 11,615.26

Project B

cost:

Principal60,000.00

time10.00

rate0.12000

Amount186,350.89

expenses 52,646.21 (same as previous)

revenues

C24,000

time7

rate0.12

FV$242,136.2815  

TOTAL

242,136.28 + 9,000 - 52,646.21 - 186,350.89 = 12,139.18‬

Internal rate of return of project A

we write the time and cash flow for each period.

TimeCash flow

0-40,000

1-3,000

2-3,000

312,000

412,000

512,000

612,000

712,000

812,000

912,000

1016,000

IRR13.54%

Then we write on excel the function =IRR(select the cashflow)

and we got the IRR of the project

answer; balance sheets;