Question

Cooper Electronics uses NPV profiles to visually evaluate competing projects. Key data for the two projects under consideration is given in the following table. Using these data, graph, on the same set of axes, the NPV profiles for each project using discount rates of 0%, 8%, and the IRR.

Initial investment (CF0) Terra Firma

$30 000 $25 000

Year (t) Operating cash inflows

1 $7 000 $6 000

2 10 000 9 000

3 12 000 9 000

4 10 000 8 000

Answer 1

IRR is calculated using IRR function in Excel

NPV is calculated using NPV function in Excel

The calculations are below :

The NPV profile plot is below :

As the NPV of Terra is higher at all discount rates, Terra should be chosen