Incremental IRR

Period Project X Project Y Incremental IRR

0 -1,700,000.00 -750,000.00 -950,000.00
1 1,100,000.00 375,000.00 725,000.00
2 900,000.00 600,000.00 300,000.00
3 750,000.00 390,000.00 360,000.00
NPV ₹ 685,497.64 421,220.09 264,277.55
IRR 30.90% 36.51% 25.52%

The required return for both projects is 8%.

Which project should you accept and why?

Since Incremental IRR is greater than discount rate of 8%, hence we should go for Project X.

n D1 D2 D3 Incremental IRR 1 (D3-D2)

0 -2,000.00 -1,000.00 -3,000.00 -2,000.00
1 1,500.00 800.00 1,500.00 700.00
2 1,000.00 500.00 2,000.00 1,500.00
3 800.00 500.00 1,000.00 500.00
IRR 34.37% 40.76% 24.81% 17.20%
NPV 586.50 402.48 474.15 71.67

Suppose discount rate is 15%.

Which project should you accept and why?

Select D1

MIRR using Discounted Cashflow

Year 0 -90,000.00 ₹ -188,627.43
Year 1 132,000.00 132,000.00
4,000.00
Year 2 100,000.00 100,000.00
Year 3 -150,000.00 -
MIRR 15.77% 2,000.00

-
Since MIRR = 15.77% > 15% (discount rate), then we should go for the project.
0 2 4 6

NPV 1 -8,000.00 0.00% (2,000.00)

NPV 2 -3,158.41 5.00%
NPV 3 -52.59 10.00% (4,000.00)
NPV 4 -0.14 10.11%
NPV 5 1,769.54 15.00%
(6,000.00)
NPV 6 2,638.89 20.00%

(8,000.00)

(10,000.00)
 (4,000.00)

(6,000.00)

NPV 7 2,800.00 25.00%

(8,000.00)
NPV 8 2,435.14 30.00%
NPV 9 1,681.15 35.00%
NPV 10 641.40 40.00% (10,000.00)

NPV 11 -0.13 42.66%

NPV 12 -605.60 45.00%
NPV 13 -2,000.00 50.00%
NPV 14 -3,496.02 55.00%
NPV 15 -5,058.59 60.00%
NPV 16 -6,660.82 65.00%

MIRR using Combined Cashflow

Year 0 -60.00 -129.44 0.20
Year 1 155.00 -
Year 2 -100.00 186.00
MIRR 19.87% -
0 1 2 3

NPV 5 -0.83 15.00% (0.20)

NPV 6 -0.28 20.00%
NPV 7 - 25.00%
NPV 8 0.06 30.00% (0.40)
NPV 9 0.00 33.33%
NPV 10 -0.05 35.00%
NPV 11 -0.31 40.00% (0.60)

Since MIRR is 19.87% which is less than discount rate of return, hence we have to reject the project.
(0.80)

(1.00)
for Project X.

Incremental IRR 2 (D2-D1) Incremental IRR 1 (D3-D1)

-1,000.00 -1,000.00
700.00 -
500.00 1,000.00
300.00 200.00
27.61% 8.80%
184.02 -112.35

Chart Title

0 2 4 6 8 10 12 14 16 18
 Chart Title

1 2 3 4 5 6 7 8

e to reject the project.

8
Compute npv profile of A and B
Compute differential cashflow