Question

# A firm must choose between two mutually exclusive projects, A & B. Project A has an...

1. 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%:
 The NPV and the IRR criteria provide the same ranking of these two projects. The NPV criterion recommends Project A while the IRR criterion recommends Project B. The NPV criterion recommends Project B while the IRR criterion recommends Project A. The NPV and IRR criteria provide different rankings, but suggest that both projects should be taken. The NPV and IRR criteria provide the same ranking, but suggest that both projects should be taken.

Project A has HIgher NPV, but the project B has higher IRR
If we have two mutually project we have to choose one those project whose NPV is greater,
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.

Feel free to comment if you still have any query or need something else. I'll help asap.

Do give a thumbs up if you find this helpful.

#### Earn Coins

Coins can be redeemed for fabulous gifts.