Question

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You are choosing between two projects. The cash flows for the projects are given in the following table ($ million) Project Year 1 Year 4 Year 0 - $52 - $100 Year 2 $22 $25 Year 3 $20 $52 $22 $59 a. What are the IRRs of the two projects? b. If your discount rate is 5.4%, 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.) The IRR for project Bis %. (Round to one decimal place.) b. If your discount rate is 5.4%, what are the NPVs of the two projects? If your discount rate is 5.4%, the NPV for project A is 5 million. (Round to two decimal places.) If your discount rate is 5.4%, the NPV for project B is $ million (Round to two decimal places.) c. Why do IRR and NPV rank the two projects differently? (Select from the drop-down menus.) NPV and IRR rank the two projects differently because they are measuring different things. Vis measuring value creation, while Vis measuring return on investment. Because returns do not scale with different levels of investment, the two measures may give different rankings when the initial investments are different.

Answer 1

Discount Rate 5.40% Year 0 Cashflows Project A Project B -52 -100 25 22 2238 | 52 16 59 IRR NPV 23.686% 20.46 Formula Used EIRR(B4:B8) =NPV(F3,B4:38) 21.460% 44.87 Formula Used IRR(C4:08) ENPV(F3,C4:08) 2 3 20

a) IRRs: For Project A= 23.686%; For Project B= 21.460%

b) NPV: For Project A= 20.46 ; For Project B= 44.87

c) NPV is measuring the value creation, while IRR is measuring return on investment.

NPV measures the present value of all the cashflows at the appropriate discount rate applicable.It gives us a sense of the total wealth the investment would yield in absolute measure.

On the other hand IRR gives us the rate of return which wold equate the present value of cash inflows to the present value of cash outflows, in other words it gives us the rate of return at which the NPV would be 0. It gives us a sense of investment return in percentage terms.