Question

Billabong Tech uses the internal rate of return​ (IRR) to select projects. Calculate the IRR for each of the following projects and recommend the best project based on this measure. Project​ T-Shirt requires an initial investment of ​$15 comma 00015,000 and generates cash inflows of ​$8 comma 0008,000 per year for 44 years. Project Board Shorts requires an initial investment of ​$25 comma 00025,000 and produces cash inflows of ​$12 comma 00012,000 per year for 55 years.

Answer 1

Solution and Explanation:

The follwoing is used to calcuate the internal rate of return for both the projects

Project T-Shirt

Present value = -15,000 , N = 4 , PMT = 8,000

Solving for the Internal rate of return = 39.08%

Project Board Shorts

Present value = -25,000 , N = 5 , PMT = 12,000

Solving for the Internal rate of return = 38.62%

Based on Internal rate of return analysis, Billabong Tech should choose project T-Shirt.