Question

Garage, Inc., has identified the following two mutually exclusive projects:

Year	Cashflow A     $	Cashflow B   $
0	-29000	-29000
1	14400	4300
2	12300	9800
3	9200	15200
4	5100	16800

Requirements:

1. Using the IRR decision rule, which project should the company accept? Is this decision necessarily correct?

If the required return is 12 percent, which project will the company choose if it applies the NPV decision rule?

Answer 1

Company should opt Cashflow A which has higher IRR compared to B.However decision may not be correct as it depends on required rate of return of investor.
Year	Cashflow A	Cashflow B
0	-29000	-29000
1	14400	4300
2	12300	9800
3	9200	15200
4	5100	16800
IRR	18.56%	17.42%
Company should opt Cashflow B which has higher NPV compared to A.
Year	Cashflow Of A	Cashflow Of B	PVF@12%	Present value of cash flow of A	Present value of cash flow of B
0	-29000	-29000	1	-29000.00	-29000.00
1	14400	4300	0.8928571	12857.14	3839.29
2	12300	9800	0.7971939	9805.48	7812.50
3	9200	15200	0.7117802	6548.38	10819.06
4	5100	16800	0.6355181	3241.14	10676.70
		NPV	3452.15	4147.55