OLL QUESTION:“Based on their respective cash flows, could you tell which one of the two investments has the higher IRR?”24Date Cash Flows(CF)CumulatedCFPresentValue of CF1/01/2014 (50)€ (50)€ -50.001/01/2015 15€ (35)€ 12.531/01/2016 20€ (15)€ 13.961/01/2017 5€ (10)€ 2.911/01/2018 20€ 10€ 9.741/01/2019 10€ 20€ 4.071/01/2020 20€ 40€ 6.79TOTAL 0.00Date Cash Flows(CF)CumulatedCFPresentValue of CF1/01/2014 (25)€ (25)€ -25.001/01/2015 15€ (10)€ 10.891/01/2016 25€ 15€ 13.181/01/2017 (25)€ (10)€ -9.571/01/2018 20€ 10€ 5.561/01/2019 10€ 20€ 2.021/01/2020 20€ 40€ 2.93TOTAL 0.00A: Investment YB: Investment ZC: Both have the same IRRD: Not enough information to answerInvestment Y Investment Z
Question
OLL QUESTION:“Based on their respective cash flows, could you tell which one of the two investments has the higher IRR?”24Date Cash Flows(CF)CumulatedCFPresentValue of CF1/01/2014 (50)€ (50)€ -50.001/01/2015 15€ (35)€ 12.531/01/2016 20€ (15)€ 13.961/01/2017 5€ (10)€ 2.911/01/2018 20€ 10€ 9.741/01/2019 10€ 20€ 4.071/01/2020 20€ 40€ 6.79TOTAL 0.00Date Cash Flows(CF)CumulatedCFPresentValue of CF1/01/2014 (25)€ (25)€ -25.001/01/2015 15€ (10)€ 10.891/01/2016 25€ 15€ 13.181/01/2017 (25)€ (10)€ -9.571/01/2018 20€ 10€ 5.561/01/2019 10€ 20€ 2.021/01/2020 20€ 40€ 2.93TOTAL 0.00A: Investment YB: Investment ZC: Both have the same IRRD: Not enough information to answerInvestment Y Investment Z
Solution
The Internal Rate of Return (IRR) is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. It is used to evaluate the attractiveness of a project or investment. If the IRR of a new project exceeds a company's required rate of return, that project is desirable. If IRR falls below the required rate of return, the project is not desirable.
In this case, we are comparing two investments, Y and Z.
For Investment Y: The cash flows are discounted back to their present value and then summed. The sum of the present values of cash flows for Investment Y is 0.00.
For Investment Z: The cash flows are also discounted back to their present value and then summed. The sum of the present values of cash flows for Investment Z is also 0.00.
Since the sum of the present values of cash flows for both investments is equal, it indicates that both investments have the same IRR.
Therefore, the answer is C: Both have the same IRR.
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