Question

NOTE: SUBJECT BUSINESS FINANCE SOLUTION REQUIRED ON THE SAME PAGE PLEASE AND NEED CORRECT SOLUTION

Alfa Corporation has identified the following two mutually exclusive projects. The CFO of the company wants to evaluate the identified projects. For this purpose he asked Mr. Naveed to evaluate those projects and establish their feasibility with the help of different capital budgeting techniques. Following are the details of the two mutually exclusive projects.

Period	Project A	Project B
	(Rs.)	(Rs.)
0	-42,000	-42,000
1	25,000	15,000
2	21,000	17,000
3	15,000	23,000
4	11,000	27,000

As per the company policy, Mr. Naveed decided to evaluate both projects with the help of IRR and NPV techniques of capital budgeting.

Requirements:

1. What is the IRR for each of these projects? Which project company should accept according to IRR rule?                                                                                                      
2. What is the NPV for each of these projects? If the required rate of return is 12 percent. Which project company should accept according to NPV rule?

III.If the decision on the basis of NPV is different than that of IRR, which particular criteria company should prefer and why?                                                                 

Answer 1

The calculation of NPV , as NPV = PV(all cash inflow@ 12%)-Cash out flow ,$NPV=\sum_{i=1}^{n}\frac{C_I}{(1+r)^n}-C_0$

for  IRR , rate at which NPV =0 , i.e   $0=\sum_{i=1}^{n}\frac{C_I}{(1+irr)^n}-C_0$

same can be calculated by use of excel function , or NPV() and IRR()

1 period Project A Project B -342,000.00 -742,000.00 325,000.00 4 1. 315,000.00 321,000.00 317,000.00 323,000.00 3 315,000.00 311,000.00 327,000.00 29.39% 9 IRR 30.55% IRR(B3:B7) IRR(D3:D7) 10 12% 11 Discount rate 12 NPV 14,729.90 318,475.09 NPV(12%,B4:B7)+B3 NPV(12%,D4:D7)+D3 13 B. 2.

Answer 1)

IRR of Project A> IRR of Project B , we should select , Project A

Answer 2)

NPV of Project B> NPV of Project A , we should select , Project B

Answer 3) we should prefer result of NPV as  NPV method provides detail on project surpluses, while IRR has concentration to achieve  the break even level of cash flow.