Question

A firm must choose between two mutually exclusive projects, A & B. Project A has an initial cost of $11000. Its projected net cash flows are $900, $2000, $3000, $4000, and $5000 at the end of years 1 through 5, respectively. Project B has an initial cost of $15000, and its projected net cash flows are $7000, $5000, $3000, $2000, and $1000 at the end of years 1 through 5, respectively. If the firm’s cost of capital is 6.00%:

A. Project B should be chosen because it has the higher IRR

B. Project B should be chosen because it has the higher NPV

C. Project A should be chosen because it has the higher IRR

D. Project A should be chosen because it has the higher NPV

E. Both projects should be chosen because both have a positive NPV

Answer 1

Correct Answer is Option D
If we have two mutually project wehave to choose one those project whose NPV is greater,
Project A should be accepted
IRR is to be calculated in excel by formula
=IRR(values,[guess])

NPV = Pv of inflow - outflow
PV of inflow is calculated on excel by formula-
=PV(rate,nper,pmt,fv)

Project A

Year	Cashflow	Pv Of CF
0	-11000	-11000.00
1	900	849.06
2	2000	1779.99
3	3000	2518.86
4	4000	3168.37
5	5000	3736.29
	NPV	1052.57
	IRR	8.75%

Project- B

Year	Cashflow	Pv Of CF
0	-15000	-15000.00
1	7000	6603.77
2	5000	4449.98
3	3000	2518.86
4	2000	1584.19
5	1000	747.26
	NPV	904.06
	IRR	9.05%

I hope this clear your doubt.

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