Consider the two mutually exclusive investment projects A and B: Cash Flows Year 0 Year 1 Year 2 3,000 10,000 Project A -2,000 Project B -5,000 2,000 (a) Verify that (yearly) Internal Rate of Return for Projects A and B are approximately 82.2% and 41.4%. (b) Suppose the cost of capital (the interest rate that you can borrow or invest) is 10% p.a. for both projects. Which project would you choose? What is the implication for decision rule in project appraisal by using Internal Rate of Return method?
Consider the two mutually exclusive investment projects A and B: Cash Flows Year 0 Year 1 Year 2 3,000 10,000 Project A -2,000 Project B -5,000 2,000 (a) Verify that (yearly) Internal Rate of Return for Projects A and B are approximately 82.2% and 41.4%. (b) Suppose the cost of capital (the interest rate that you can borrow or invest) is 10% p.a. for both projects. Which project would you choose? What is the implication for decision rule in project appraisal by using Internal Rate of Return method?
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section: Chapter Questions
Problem 7P
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