Question 3 You are the CEO of a real-estate company. There are two mutually exclusive one-time projects you consider investing in: Project A - The project has a 10 year lifecycle. It demands an initial investment of $192,540, and the project's yearly revenues are expected to be $40,000. Project B- The following table presents the project's expected cash flows: Cash flows Year 0 Year 1 Year 2 Year 3 Year 4
Cah flows -$150,000 $60,000 $60,000 $90,000 $90,0000
The cost of capital for both projects is 5%. a. What is the IRR of project A? i. 8.24% ii. 12.77% iii. 16.11% iv. 17.45% Answer: The IRR of project A is: ______
b. What is the IRR of project B?
i. 15.84% ii. 31.50% iii. 29.11% iv. 34.79% Answer: The IRR of project B is:_____
c. According to the IRR criterion, in which project (A or B) should the company invest in? Answer: The company should invest in project:_____ d. In which project (A or B) should the company invest in? Answer: The company should invest in project:_____ e. Explain why there is a difference between the answers to items (c) and (d). Show your calculation.