Question

You have two potential investment projects, Project A and Project B. You can take one, but not both. The annual cash flows for the two projects are: Year 0 1 2 3 Project A Cash Flow -$50,000 $45,000 $5,000 $5,000 (respectively) Project B Cash Flow -$50,000 $5,000 $5,000 $50,000 (respectively). a) Compute the IRR for each project. b) Compute the NPV for each project if the appropriate discount rate is 5%. Which project would you take, and why? c) Compute the NPV for each project if the appropriate discount rate is 10%.   Which project would you take, and why? d) Summarize the principles demonstrated by this problem.

Answer 1

a: IRR of A = 7.87%, IRR of B = 6.89%

b: NPV at 5% is higher for Project B hence that will be selected.

c: NPV at 10% is higher for A hence A will be selected.

Year	A	B
0	-50000	-50000
1	45000	5000
2	5000	5000
3	5000	50000
IRR	7.87%	6.89%
NPV	1711.48	2488.93
NPV	-1202.10	-3756.57

WORKINGS