Question

Crane Corp. management is evaluating two mutually exclusive projects. The cost of capital is 15 percent. Costs and cash flows for each project are given in the following table.

Year		Project 1		Project 2
0		-$1,304,168		-$1,325,262
1		264,000		379,000
2		365,000		379,000
3		445,000		379,000
4		539,000		379,000
5		739,000		379,000

Calculate NPV and IRR of two projects. (Enter negative amounts using negative sign, e.g. -45.25. Do not round discount factors. Round other intermediate calculations and final answer to 0 decimal places, e.g. 1,525. Round IRR answers to 2 decimal places, e.g. 15.25 or 12.25%.)

Answer 1

NPV = Present value of cash Inflows - Present value of cash

Project 1:

NPV = [264000*1/(1.15)^1+365000*1/(1.15)^2+445000*1/(1.15)^3+539000*1/(1.15)^4+739000*1/(1.15)^5]-1304168

= $ 169,572.99

Answer = $ 169,573

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Project 2:

NPV = [379000*1/(1.15)^1+379000*1/(1.15)^2+379000*1/(1.15)^3+379000*1/(1.15)^4+379000*1/(1.15)^5]-1325262

= - $ 54,795.22

Answer = - $ 54,795.22

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Project 1:

Let the IRR be x.

Now , Present Value of Cash Outflows=Present Value of Cash Inflows

1304168 = 264000/(1.0x) +365000/ (1.0x)^2 +445000/(1.0x)^3+539000/(1.0x)^4+739000/(1.0x)^5   

Or x= 19.52%

Hence the IRR is 19.52%

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Project 2:

Let the IRR be y.

Now , Present Value of Cash Outflows=Present Value of Cash Inflows

1325262=379000/(1.0y) + 379000/ (1.0y)^2  + 379000/(1.0y)^3 + 379000/(1.0y)^4 + 379000/(1.0y)^5

Or y= 13.24%

Hence the IRR is 13.24%