Question

You are choosing between two projects. The cash flows for the projects are given in the following table? ($ million):

Project	Year 0	Year 1	Year 2	Year 3	Year 4
A	-$52	$ 26	$ 21	$20	$17
B	-$101	$ 21	$ 38	$48	$61

a. What are the IRRs of the two? projects? IRR for project A is _ ?IRR for project B is _

b. If your discount rate is 5.1 % what are the NPVs of the two? projects?npv for project A is _,npv for project B is _

c. Why do IRR and NPV rank the two projects? differently? and explain how ? irr project for A ans 25.6 is wrong.(round to the one decimal)

Answer 1

Project	IRR	NPV
A	24.4%	$22.91
B	20.0%	$44.72

IRR and NPV can be calculated using IRR and NPV function on a calculator

For A, Insert CF0 = -52,.... CF4 = 17 => Compute IRR = 24.4% and similarly for B

With I/Y = 5.1% => Compute NPV = $22.91 for A and $44.72 for B.

IRR measures the rate of return from the investment while NPV measures the value creation from the investment. As the size of two projects are different, returns don't increase with increase in size but value does increase. Hence, both rank project differently as IRR and NPV measure different things.