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HH Companies has identified two mutually exclusive projects. Project A has cash flows of −$40,000, $21,200, $16,800, and $14,000 for Years 0 to 3, respectively. Project B has a cost of $38,000 and annual cash inflows of $25,500 for 2 years. At what rate would you be indifferent between these two projects? (Please do not use excel to solve this question)- SOLVE USING FORMULAA) 6.34 percentB) −1.72 percentC) 9.41 percentD) −4.38 percentE) 8.28 percent

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amanarsalan

Answer:

D) −4.38 percent

Explanation:

Year 0 Difference = -$40,000 - (-$38,000) = -$2,000

Year 1 Difference = $21,200 - $25,500 = -$4,300

Year 2 Difference = $16,800 - $25,500 = -$8,700

Year 3 Difference = $14,000 - $0 = $14,000

[tex]NPV = 0 - \frac{4300}{1+IRR}-\frac{8700}{(1+IRR)^{2} } -\frac{14000}{(1+IRR)^{3} }[/tex]

Where NPV = 0

IRR = -0.0438

IRR = -4.38%

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