Managerial Accounting for Internal Rate of Return Order Instructions: please answer the questions as they are
Managerial Accounting for Internal Rate of Return Sample Answer
Name
Institution
Introduction
Question 1
| 10.00% | 10.00% | 17.00% | 17.00% | |
| Year | Project A | Project B | Project A | Project B |
| 0 | -400 | -650 | -400 | -650 |
| 1 | -528 | 210 | -528 | 210 |
| 2 | -219 | 210 | -219 | 210 |
| 3 | -150 | 210 | -150 | 210 |
| 4 | 1100 | 210 | 1100 | 210 |
| 5 | 820 | 210 | 820 | 210 |
| 6 | 990 | 210 | 990 | 210 |
| 7 | -325 | 210 | -325 | 210 |
| NPV | $478.83 | $372.37 | $133.76 | $173.70 |
| IRR | 20.65% | 25.84% | 20.65% | 25.84% |
To obtain the IRR, the excel formula has been used. For Project A the Internal Rate of return is 20.65% while for Project B the IRR is equal to 25.84% (Garrison, Noreen & Brewer, 2009). At the rate of 10%, the best project to select is project A as its NPV is higher than that of Project B however its IRR is higher than that of project A. At 17%, the scenario remains the same however the NPVs are much lower than when the discounting rate is 10%.
Question 2
| 10% | |||||
| Year 0 | -400 | Reinvest | discount factor | Returns | |
| Year 1 | -528 | 6 | 1.771561 | -935.384208 | (-528*(1+0.1)^6) |
| Year 2 | -219 | 5 | 1.61051 | -352.70169 | (-219(1+.1)^5) |
| Year 3 | -150 | 4 | 1.4641 | -219.615 | (-150(1+.1)^4) |
| Year 4 | 1100 | 3 | 1.331 | 1464.1 | 1100(1+.1)^3 |
| Year 5 | 820 | 2 | 1.21 | 992.2 | 820(1+.1)^2 |
| Year 6 | 990 | 1 | 1.1 | 1089 | 990(1+.1)^1 |
| Year 7 | -325 | 0 | 1 | -325 | (-325(1+.1)^0) |
| IRR | 20.65% | MIRR | 23.09% | 1712.599102 | 0.230914695 |
|
MIRR=(1712.599/400)^(1/7)-1 =0.2309 = 23.09% |
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| 17% | |||||
| Year 0 | -400 | Reinvest | discount factor | Returns | |
| Year 1 | -528 | 6 | 2.565164 | -1354.4067 | (-528*(1+0.17)^6) |
| Year 2 | -219 | 5 | 2.192448 | -480.14612 | (-219(1+.17)^5) |
| Year 3 | -150 | 4 | 1.873887 | -281.083082 | (-150(1+.17)^4) |
| Year 4 | 1100 | 3 | 1.601613 | 1761.7743 | 1100(1+.17)^3 |
| Year 5 | 820 | 2 | 1.3689 | 1122.498 | 820(1+.17)^2 |
| Year 6 | 990 | 1 | 1.17 | 1158.3 | 990(1+.17)^1 |
| Year 7 | -325 | 0 | 1 | -325 | (-325(1+.17)^0) |
| IRR | 20.65% | MIRR | 21.92% | 1601.9364 | 0.219224304 |
= (1601.9364/400) ^ (1/7)-1 = 0.219224304 = 21.92%
| 10% | |||||
| Year 0 | -650 | Reinvest | discount factor | Returns | |
| Year 1 | 210 | 6 | 1.771561 | 372.02781 | (210*(1+0.1)^6) |
| Year 2 | 210 | 5 | 1.61051 | 338.2071 | (210(1+.1)^5) |
| Year 3 | 210 | 4 | 1.4641 | 307.461 | (210(1+.1)^4) |
| Year 4 | 210 | 3 | 1.331 | 279.51 | 210(1+.1)^3 |
| Year 5 | 210 | 2 | 1.21 | 254.1 | 210(1+.1)^2 |
| Year 6 | 210 | 1 | 1.1 | 231 | 210(1+.1)^1 |
| Year 7 | 210 | 0 | 1 | 210 | (210(1+.1)^0) |
| IRR | 25.84% | MIRR | 17.35% | 1992.30591 | 0.17352355 |
|
MIRR =(1992.30591/650)^(1/7)-1 = 0.17352355 = 17.35% |
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| 17% | |||||
| Year 0 | -650 | Reinvest | discount factor | Returns | |
| Year 1 | 210 | 6 | 2.565164 | 538.6844824 | (210*(1+0.17)^6) |
| Year 2 | 210 | 5 | 2.192448 | 460.4140875 | (210(1+.17)^5) |
| Year 3 | 210 | 4 | 1.873887 | 393.5163141 | (210(1+.17)^4) |
| Year 4 | 210 | 3 | 1.601613 | 336.33873 | 210(1+.17)^3 |
| Year 5 | 210 | 2 | 1.3689 | 287.469 | 210(1+.17)^2 |
| Year 6 | 210 | 1 | 1.17 | 245.7 | 210(1+.17)^1 |
| Year 7 | 210 | 0 | 1 | 210 | (210(1+.17)^0) |
| IRR | 25.84% | MIRR | 21.02% | 2472.122614 | 0.210262345 |
MIRR = (2472.1226/650)^(1/7)-1 = 0.21026 = 21.02%
Question 3
| Project A | Project B | Project A | Project B | ||||
| Year 1 | -528 | 210 | -738 | -935.384208 | 372.02781 | -1307.412 | 569.412 |
| Year 2 | -219 | 210 | -429 | -352.70169 | 338.2071 | -690.9088 | 261.9088 |
| Year 3 | -150 | 210 | -360 | -219.615 | 307.461 | -527.076 | 167.076 |
| Year 4 | 1100 | 210 | 890 | 1464.1 | 279.51 | 1184.59 | -294.59 |
| Year 5 | 820 | 210 | 610 | 992.2 | 254.1 | 738.1 | -128.1 |
| Year 6 | 990 | 210 | 780 | 1089 | 231 | 858 | -78 |
| Year 7 | -325 | 210 | -535 | -325 | 210 | -535 | 0 |
| IRR | -21% |
The crossover rate is -21%
The crossover rate refers to the rate at which any two companies can be compared at the same NPV value. The crossover rate assists project managers to analyze and identify the projects to be undertaken. The rate compares relative performance between different projects. It’s obtained by calculating the differences in the two respective projects cash flows the deducting the results from the differences between the two projects cash flows. The internal rate of the differences makes up the crossover rate (Ross, Westerfield & Jaffe, 2013).
Question 4) Porter manufacturing NPV
| 10% | 10% | 10% |
| -100,000 | -100,000 | -100,000 |
| 20000 | 30000 | 40000 |
| 20000 | 30000 | 40000 |
| 20000 | 30000 | 40000 |
| 20000 | 30000 | 40000 |
| 20000 | 50000 | 70000 |
| ($24,184.26) | $26,142.03 | $70,259.11 |
The NPV for the first project is (24184.26), $26,142.03 and $70,259.11 for the three projects respectively.
Managerial Accounting for Internal Rate of Return References
Garrison, R., Noreen, W., & Brewer, P. (2009) Managerial Accounting, New York, NY: McGraw-Hill Irwin. 65 -70
Ross, S. A., Westerfield, R. W., & Jaffe, J. (2013) Corporate finance (10th ed.) New York, NY: McGraw-Hill Irwin.
