Sun Lee's is considering two mutually exclusive projects that have been assigned the same discount rate of 10.5 percent.Project A has an initial cost of $54,500,and should produce cash inflows of $16,400,$28,900,and $31,700 for Years 1 to 3,respectively.Project B has an initial cost of $79,400,and should produce cash inflows of $0,$48,300,and $42,100,for Years 1 to 3,respectively.What is the incremental IRR?
A)−15.40 percent
B)−11.23 percent
C)4.08 percent
D)7.83 percent
E)13.89 percent

Question

Quizplus · Accepted Answer

To calculate the incremental IRR, we need to calculate the cash flows of the difference between the two projects (i.e., Project B - Project A):
Year 1: -$54,500
Year 2: $48,900 ($48,300 - $16,400)
Year 3: $10,400 ($42,100 - $31,700)
Using a financial calculator or Excel, we can find that the incremental IRR is -15.40 percent. Since this is a negative rate of return, it means that Project A is the better choice. Therefore, the best choice is Project A.

Sun Lee's Is Considering Two Mutually Exclusive Projects That Have