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Kase Company can invest in each of three cheese-making projects: C1, C2, and C3. Each project requires an initial investment of $190,000 and would yield the following annual cash flows.



C1

C2

C3

Year 1

$ 10,000

$ 80,000

$ 150,000

Year 2

90,000

80,000

50,000

Year 3

140,000

80,000

40,000

Totals

$ 240,000

$ 240,000

$ 240,000



(1) Assuming that the company requires a 12% return from its investments, use net present value to determine which projects, if any, should be acquired. (2) Using the answer from part 1, explain whether the internal rate of return is higher or lower than 12% for project C2. (3) Compute the internal rate of return for project C2.

Exercise 25-7


Kase Company can invest in each of three cheese-making projects: C1, C2, and C3. Each project requires an initial investment of $190,000 and would yield the following annual cash flows.



C1

C2

C3

Year 1

$ 10,000

$ 80,000

$ 150,000

Year 2

90,000

80,000

50,000

Year 3

140,000

80,000

40,000

Totals

$ 240,000

$ 240,000

$ 240,000


(1) Assuming that the company requires a 12% return from its investments, use net present value to determine which projects, if any, should be acquired. (2) Using the answer from part 1, explain whether the internal rate of return is higher or lower than 12% for project C2. (3) Compute the internal rate of return for project C2.




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