Question

Problem 8-10 NPV versus IRR [LO 3, 4) Romboski, LLC, has identified the following two mutually exclusive projects: Year O 1 Cash Flow (A) Cash Flow (B) -$ 63,000 $63,000 39,000 25,700 33,000 29,700 22,500 35,000 14,600 24,700 Requirement 1: (a) What is the IRR for each of these projects? (Do not round intermediate calculations. Enter your answer as a percentage roundedto 2 decimal places (e.g., 32.16).) Internal rate of return Project A Project B (b) if you apply the IRR decision rule, which project should the company accept? Click to select) Requirement 2: alAssume the required return is 14 percent. What is the NPV for each of these print

Answer 1

Requirement 1

a. IRR

Year	Cash Flow (A)	Cash Flow (B)
0	($63,000)	($63,000)
1	39000	25700
2	33000	29700
3	22500	35000
4	14600	24700
IRR	32.09%	28.99%

For the calculation of IRR use the formula of IRR in excel

=IRR(Values,[guess])

=IRR(Range from year 0 to year 4)

b. In the above question Cost of capital is not given and IRR is greater in case of Project A i.e. 32.09% therefore Project A should be accepted

Requirement 2

a.

Year	Cash Flow (A)	Present Value of Project A @14%	Cash Flow (B)	Present Value of Project A @14%
0	($63,000)	($63,000.00)	($63,000)	($63,000.00)
1	39000	$34,210.53	25700	$22,543.86
2	33000	$25,392.43	29700	$22,853.19
3	22500	$15,186.86	35000	$23,624.00
4	14600	$8,644.37	24700	$14,624.38
NPV		$20,434.19		$20,645.43

b. In case of NPV accept the project which has a higher NPV therefore in this case Project B should be accepted which has a higher NPV.

Requirement 3

To find the crossover rate, we subtract the cash flows from one project from the cash flows of the other project. Here, we willsubtract the cash flows for Project B from the cash flows of Project A. Once we find these differential cash flows, we find the IRR

Year	Cash Flow (A)	Cash Flow (B)	Difference Between Project A and Project B
0	($63,000)	($63,000)	$0
1	39000	25700	$13,300
2	33000	29700	$3,300
3	22500	35000	($12,500)
4	14600	24700	($10,100)
IRR			14.76%

=IRR(Values,[guess])

=IRR(Range from year 0 to year 4)

a. At discount rates above 14.76% choose project A

b. At discount rates Below 14.76% choose project B

c. Indifferent between A and B at a discount rate of 14.76%.

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