Question

You are choosing between two projects. The cash flows for the projects are given in the following table ($ million): Project Year 0 - $49 - $101 Year 1 $26 $18 Year 2 $19 $42 Year 3 $21 $52 Year 4 $17 $61 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 Ais %. (Round to one decimal place.)

Answer 1

a.Project A

Internal rate of return can be calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$49. It is entered with a negative sign since it is a cash outflow.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the IRR button and enter the interest rate. To get the IRR of the project.

The IRR of project A is 27.0495% $\rightarrow$ 24.1%

Project B

Internal rate of return can be calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$101. It is entered with a negative sign since it is a cash outflow.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the IRR button and enter the interest rate. To get the IRR of the project.

The IRR of project B is 21.2%.

b. Project A

Net present value can be calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$49. Indicate the initial cash flow by a negative sign since it is a cash outflow.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the NPV button and enter the discount rate of 5.2%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.

The net present value is $24.8

Project B

Net present value can be calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$101. Indicate the initial cash flow by a negative sign since it is a cash outflow.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the NPV button and enter the discount rate of 4.6%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.

The net present value is $48.5

c.NPV and IRR rank two projects differently because is the NPV and IRR approaches use different reinvestment rate assumptions. It is also because the criteria used by both the methods. For the net present value (NPV) criteria, a project is acceptable if the NPV is positive, while for the internal rate of return (IRR), a project is acceptable if the IRR is greater than the cost of capital.

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