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Capital Budgeting : NPW and IRR methods

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University Athletic Wear (UAW) is evaluating several new product proposals. Resources are available for any or all of the products . UAW uses a MARR of 15% and a time span of 5 years for project evaluations. Determine which new product(s) should be chosen using Internal rate of return criteria.

MARR=15%
Investment Cash Flows
Project 1 2 3 4 5
Shorts ($450,000) $80,000 $120,000 $150,000 $150,000 $150,000
Shirts ($200,000) $50,000 $70,000 $80,000 $80,000 $80,000
Jackets ($500,000) $150,000 $150,000 $150,000 $150,000 $150,000

a. Determine which new product(s) should be chosen using the Internal rate of return criteria.

b. Determine which new product(s) should be chosen using the present worth criteria.

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Solution Summary

Solution chooses the appropriate investment proposal/s.

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Please refer attached file for better clarity of tables and formulas.

a Determine which new product(s) should be chosen using the Internal rate of return criteria.

Year Shorts Shirts Jackets
Initial ($450,000) ($200,000) ($500,000)
1 $80,000 $50,000 $150,000
2 $120,000 $70,000 $150,000
3 $150,000 $80,000 $150,000
4 $150,000 $80,000 $150,000
5 $150,000 $80,000 $150,000

We can use IRR function in MS Excel to IRR for the projects
IRR for "Shorts"=12.35% =IRR(B5:B10)
IRR for "Shirts"=21.52% =IRR(C5:C10)
IRR for "Jackets"=15.24% =IRR(D5:D10)
IRR is above 15% for ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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