Question: 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.