Question

You are choosing between two projects. The cash flows for the projects are given in the following table ($ million): Project Year 2 Year 0 - $49 - $102 Year 1 $25 $20 $19 Year 3 $18 $52 Year 4 $12 $62 $41 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? a. What are the IRRs of the two projects? The IRR for project A is %. (Round to one decimal place.)

CAN SOMEONE PLEASE HELP WITH THIS QUESTION. THANK YOU!

Answer 1

Part a:

А 1 Year Project A Project B -49 -102 25 2 19 41 3 18 52 12 7 IRR= 21.49% 21.36% 8 Formula used: IRR(B2:B6) IRR(C2:06) 62

IRR of project A is 21.49%

IRR of project B is 21.36%

Part b:

A 1 Year Project A Project B -49 -102 25 20 52 19 41 18 12 62 7 NPV= $17.19 $49.34 8 Formula used: B2+NPV(5.2%,B3:36) C2+NPV(5.2%,C3:06)

NPV of project A at 5.2% is $17.19

NPV of project B at 5.2% is $49.34

Part c:

IRR and NPV rank a project differently because IRR compares the cost of capital with the internal rate of return of the project but NPV ranks projects according to the net present value of the cash flows the project generates.

According to IRR decision rule, the project with higher internal rate of return (must be greater than the cost of capital) will take the first rank irrespective of the value of NPV

According to NPV decision rule, the project with higher NPV will take the first rank irrespective of the value of IRR