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Mutually Exclusive Projects for New Warehouse Capacity

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Bell Manufacturing is attempting to choose the better of two mutually exclusive projects for expanding the firm's warehouse capacity. The relevant cash flows for the projects are shown in the following table. The firm's cost of capital is 15%.

Project X Project Y
Initial investment (CF0) $500,000 $325,000
Year (t) Cash inflows (CFt)
1 $100,000 $140,000
2 120,000 120,000
3 150,000 95,000
4 190,000 70,000
5 250,000 50,000

a. Calculate the IRR to the nearest whole percent for each of the project.
b. Assess the acceptability of each project on the basis of the IRRs found in part A.
c. Which project, on this basis, is preferred?

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IRR is calculated by Excel function:

Year ...

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Solution explains Mutually exclusive projects for new warehouse capacity

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