Question

You are choosing between two projects. The cash flows for the projects are given in the following table (S million) Year 1 Project Year 0 Year 2 Year 3 Year 4 $15 -$49 - $102 $24 $21 $19 $38 $18 $52 $60 a. What are the IRRS of the two projects? b. If your discount rate is 5.2%, what are the NPVS of the two projects? c. Why do IRR and NPV rank the two projects differently?

Answer 1

1 Year Project A Project B -49 -102 24 19 w NP 52 7 IRR= 8 NPV at 5.2%= 15 22.15% $18.69 20.40% $45.95

1 Year Project A Project B -102 4 2 38 52 5 3 6 4 60 7 IRRE =IRR(T2:T6) =IRR(U2:06) 8 NPV at 5.2%= =T2+NPV(5.2%,T3:16) =U2+NPV(5.2%,U3:06)

Part a:
IRR for project A is 22.15%
IRR for project B is 20.40%

Part b:
NPV for project A at a discount rate of 5.2% is $18.69
NPV for project B at a discount rate of 5.2% is $45.95

Part c:
Ranks according to IRR
Rank 1: Project A
Rank 2: Project B
Ranks according to NPV
Rank 1: Project B
Rank 2: Project A

According to IRR the project with highest value of IRR is ranked as first, however as per NPV, the project with highest value of NPV is ranked as first. That is why IRR and NPV rank two projects differently.