Question

NVP versus IRR. Romboski, LLC, has identified the following two mutually exclusive projects:

Year	Cash Flow (A)	Cash Flow (B)
0	($65,000)	($65,000)
1	$34,000	$19,000
2	$27,000	$25,000
3	$21,000	$29,000
4	$17,000	$34,000
IRR	22.23%	21.01%

1. Over what range of discount rates would you choose Project A? Project B? At what discount rate would you be indifferent between these two projects? Explain.

Answer 1

fi =IRR(B21:B25) B26 А 1 A 2 year в Cash flows [email protected]% Present value 0 $(65,000.00) 1.0000 $ (65,000.00) 1 $ 34,000.00 0.8598 $ 29,233.30 2 $ 27,000.00 0.7393 $ 19,960.05 3 $ 21,000.00 0.6356 $ 13,347.99 4 $ 17,000.00 0.5465 $ 9,290.62 22.23% NPV $ 6,831.95 8 IRR 16 10 B 11 year Cash flows [email protected]% Present value 12 0 $(65,000.00) 1.0000 $ (65,000.00) 13 11 $ 19,000.00 0.8598 $ 16,336.25 2 $ 25,000.00 0.7393 $ 18,481.52 3 $ 29,000.00 0.6356 $ 18,432.94 4 $ 34,000.00 0.5465 $ 18,581.23 17 IRR 21.01% NPV $ 6,831.95 19 Difference (A-B) 20 year C ash flows 0 $ - Above 16.31% Select A 1 $ 15,000.00 Below 16.31% Select B 2 $ 2,000.00 At 16.31% Indifferent 3 $ (8,000.00) 4 $(17,000.00) 16.31%|Cross Over rate 27

B26 fx =IRR(B21:B25) А [email protected]% 1 A 2 year 30 4 1 5 2 63 74 8 IRR Cash flows -65000 34000 27000 21000 17000 =IRR(B3:37) =C3/(1+$B$26) =C4/(1+$B$26) =C5/(1+$B$26) =C6/(1+$B$26) NPV Present value =B3*C3 =B4*C4 =B5*C5 =B6*C6 =B7*07 -SUM(D3:07) [email protected]% 10 B 11 year 12 0 13 1 14 2 15 3 16 4 17 IRR Cash flows -65000 19000 25000 29000 34000 =IRR(B12:B16) =C12/(1+$B$26) =C13/(1+$B$26) =C14/(1+$B$26) =C15/(1+$B$26) NPV Present value =B12*012 =B13*013 =B14*C14 =B15*C15 =B16*C16 =SUM(D12:016) 19 Difference (A-B) 20 year 21 0 22 1 23 2 Cash flows =B3-B12 =B4-B13 =B5-B14 =B6-B15 =B7-B16 =IRR(B21:B25) Above 16.31% Select A Below 16.31% Select B At 16.31% Indifferent 24 3 25 4 26 IRR Cross Over rate 27