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
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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