A firm utilizes a strategy of capital rationing, which is currently $375,000 and is considering the following two projects: Project A has a cost of $335,000 and the following cash flows: year 1 $140,000; year 2 $150,000; and year 3 $100,000. Project B has a cost of $365,000 and the following cash flows: year 1 $220,000; year 2 $110,000; and year 3 $150,000. Using a 6% cost of capital, what is the internal rate of return of project B?

Question

Quizplus · Accepted Answer

The internal rate of return (IRR) of Project B is higher than 6% because the sum of the discounted cash flows at a 6% discount rate exceeds the initial investment, indicating an IRR greater than 6%.

A Firm Utilizes a Strategy of Capital Rationing, Which Is