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30 October, 07:56

Pierce Chocolates and Berry Sweets both have new projects that require an initial investment of $450,000 and will have annual cash inflows of $110,000. If Pierce expects its project to last 5 years and Berry expects its project to last 6 years, which one has the higher internal rate of return?

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  1. 30 October, 11:31
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    Using a financial calculator, input the following using the "CF" button;

    Pierce Chocolates has 5 years of cash inflows;

    Initial investment; CF0 = - 450,000

    Yr1 Cashflow; CF1 = 110,000

    Yr2 Cashflow; CF2 = 110,000

    Yr3 Cashflow; CF3 = 110,000

    Yr4 Cashflow; CF4 = 110,000

    Yr5 Cashflow; CF5 = 110,000

    Then compute Internal rate of return; IRR CPT = 7.09%

    Berry Sweets has 6 years of cash inflows;

    Initial investment; CF0 = - 450,000

    Yr1 Cashflow; CF1 = 110,000

    Yr2 Cashflow; CF2 = 110,000

    Yr3 Cashflow; CF3 = 110,000

    Yr4 Cashflow; CF4 = 110,000

    Yr5 Cashflow; CF5 = 110,000

    Yr6 Cashflow; CF6 = 110,000

    Then compute Internal rate of return; IRR CPT = 12.18% hence higher.
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