Question

"A firm is considering two projects with the following cash flows and internal rates of return. If the firm's MARR is 12%, should it select project A, project B, or neither? It cannot select both the projects.
Project A
Year 0: -7
Year 1: 0
Year 2: 9
Project B
Year 0: X
Year 1: 0
Year 2: 32
The IRR for Project A is 13.39% and that of Project B is 20.29%.
Enter the net present worth of the preferred project. You will need to solve for X first. ENTER '0' if neither project is preferred."

Answer 1

For project B,

IRR (R) = 20.29%

Value of X = 0/(1+20.29%) + 32/(1+20.29%)^2

Value of X = 22.115 (-ve)

Now,

At MARR = 12%

For project A:

NPW of the project A = 0 + 9/(1+12%)^2 – 7

NPW of the project A = .175

For project B:

NPW of the project B = 0 + 32/(1+12%)^2 – 22.115

NPW of the project B = 3.395

Since net present worth of the project B is 3.395 that is higher than that the net present worth of the project A.

So, net present worth of the selected project B = 3.395