Question

You are choosing between two projects. The cash flows for the projects are given in the following table (s million) Project Year 1 Year 3 Year 0 -$50 - $99 Year 2 $20 $25 $18 Year 4 $16 $19 $442 $49 a. What are the IRRs of the two projects? b. If your discount rate is 53% 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 AsO (Round to one decimal place.)

Answer 1

a & b. IRR is the internal rate of return at which present value of cash inflows is equal to initial investment

Initial investment = sum of [cash flow/(1+IRR)^year]

NPV is the difference between present value of cash inflows and initial investment at the discount rate.

NPV = year 1 cash flow/(1+discount rate)¹ + year 2 cash flow/(1+discount rate)²... - initial investment

IRR of project A is 23.2% an project B is 21%.

NPV of project A is $20.2 million and project B $46.1 million.

Discount rate	5.30%	5.30%
Year	Project A	Project B
0	-$50	-$99
1	$25	$19
2	$20	$42
3	$18	$49
4	$16	$58
IRR	23.2%	21.0%
NPV	$20.2	$46.1

Formula and calculation

A 0.053 0.053 Discount rate Year Project A Project B IRR 16 =IRR(B4:38) =NPV(B2, B5:B8) +B4 =IRR(C4:08) =NPV(C2,C5:08)+C4 NPV

c. both IRR and NPV gives different values to measure a project's viability. IRR gives the rate of return or break-even rate of return at which cost and return from a project will be equal. of discount rate of that project is lower than it's IRR then project will generate extra returns.

NPV gives the extra return of a project at a given discount rate. it measures whether the project will create any value. If initial investment of the projects are different then IRR and NPV will give different ranks to project because project which has higher initial investment will have lower IRR.