Question

Consider the three mutually exclusive projects that follow. The​ firm's MARR is 9​% per year.

EOY	Project 1	Project 2	Project 3
0	−​$10,000	−​$9,000	−​$10,000
1−3	​$5,130.54	​$4,713.45	​ $4,926.60

a. Calculate each​ project's PW.

PW1 =​$___________(Round to the nearest​ dollar.)

PW2=​$____________​(Round to the nearest​ dollar.)

PW3=​$____________​(Round to the nearest​ dollar.)

b. Determine the IRR of each project.

IRR1=_________​%.​(Round to one decimal​ place.)

IRR2=_________​%.​(Round to one decimal​ place.)

IRR3=_________​%.​(Round to one decimal​ place.)

c. Which project would you​ recommend? Choose the correct answer below.

A.Project 1

B.Project 2

C.Project 3

d. Why might one project have the highest PW while a different project has the largest​ IRR? Choose the correct answer below.

A. This is because the IRR method assumes reinvestment of cash flows at the MARR and the PW method assumes reinvestment at the MARR too.

B. This is because the IRR method assumes reinvestment of cash flows at the IRR whereas the PW method assumes reinvestment at the MARR.

C. This is because the IRR method assumes reinvestment of cash flows at the MARR whereas the PW method assumes reinvestment at the IRR.

D. This is because the IRR method assumes reinvestment of cash flows at the IRR and the PW method assumes reinvestment at the IRR too.

Answer 1

EOY	Project 1	Project 2	Project 3
0	-10,000	-9,000	-10,000
1	5,130.54	4,713.43	4,926.60
2	5,130.54	4,713.43	4,926.60
3	5,130.54	4,713.43	4,926.60
NPV	₹ 2,986.91	₹ 2,931.07	₹ 2,470.68
IRR	25.1%	26.5%	22.4%

a. Using excel function NPV = NPV(9%,cashflow series from 1 to 3 EOY)+Initial investment
PW1 =$ 2987
PW2=$ 2931
PW3=$ 2471
b. Using excel function NPV = NPV(9%,cashflow series from 1 to 3 EOY)+Initial investment
IRR1=25.1%
IRR2=26.5%
IRR3=22.4%
c. Option A Project 1, It is always better to select based on present worth in terms of value as it would give clear picture than IRR which is in percent
d. Option B
PW assumes reinvestment of cash flows at the cost of capital which is MARR while IRR assumes at cash flows are reinvested at IRR