Question

Consider two mutually exclusive projects A and B: Cash Flows (dollars) Project C0 C1 C2 NPV at 11% A −36,500 26,200 26,200 +$8,368 B −56,500 39,500 39,500 +11,145 a. Calculate IRRs for A and B. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.) b. Which project does the IRR rule suggest is best? Project A Project B c. Which project is really best?

Answer 1

Solution: a) NPV Project A Year Cashflow PV factor at 11% PV factor working | b 0 -36500 26200 26200 1.000001/(1+0.11)^0 0.900901/(1+0.11)41 0.81162 1/(1+0.11)^2 NPV PV c=a*b -36500.00 23603.60 21264.51 8368 2 Project B Year Cashflow PV factor working -56500 39500 39500 PV factor at 11% b 1.00000 0.90090 0.81162 1/(1+0.11)^0 1/(1+0.11)41 1/(1+0.11)^2 NPV PV c=a*b -56500.00 35585.59 32059.09 11145 2 Project A IRR by trial and error method Year cash flow Discount factor at 25% Tь 0 -36500.00 1.00000 1 26200.00 0.80000 2 26200.00 0.64000 NPV PV at 25% Discount factor at 28% PV at 28% Discount factor at 27% PV at 27% c=a*b Je=a*d d e=a*d -36500.00 1.00000 -36500.00 1.00000 -36500.00 20960.00 0.78125 20468.75 0.78740 20629.92 16768.00 0.6103515991.21 0.62000 16244.03 1228.00 NPV -40.04 NPV 373.95 By interpolation IRR= 28-140.04/(40.04+373.95)) 27.90%

Year Project B. IRR by trial and error method cash flow Discount factor at 25% PV at 25% Discount factor at 26% PV at 26% la b c=a*b e=a*d 0 -56500.00 1.00000 -56500.00 1.00000-56500.00 1 39500.00 0.80000 31600.00 0.79365 31349.21 2 39500.00 0.64000 25280.00 0.6298824880.32 NPV 380.00 NPV -270.47 By interpolation IRR= 25+(380/(380+270.47)) 25.58% IRR rule suggest Porject Ais best. (as it has higher IRR) Project B. (as it has higher NPV)