Question

You are choosing between two projects. The cash flows for the projects are given in the following table ($ million): Project A Year 0 - $48 -$101 Year 1 $23 $20 Year 2 $20 $41 Year 3 $21. $50 Year 4 $13 $59 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

	Project-A:					Project-B:
	Year	Cashflows ($)	DF @ 5.2%	P.V.		Year	Cashflows ($)	DF @ 5.2%	P.V.
	0	-48	1	-48		0	-101	1	-101.00
	1	23	0.95057	21.86311787		1	20	0.95057	19.01
	2	20	0.903584	18.07167951		2	41	0.903584	37.05
	3	21	0.85892	18.0373227		3	50	0.85892	42.95
	4	13	0.816464	10.61403201		4	59	0.816464	48.17
			NPV	20.58615209					46.18
			IRR	24.09%				IRR	20.68%
		IRR and NPV rank the two projects differently because they both have different mechanisms of calculation.
		It is illustrated in the table below:
		BASIS FOR COMPARISON		NPV			IRR
		Meaning		The total of all the present values of cash flows (both positive and negative) of a project is known as Net Present Value or NPV.			IRR is described as a rate at which the sum of discounted cash inflows equates discounted cash outflows.
		Expressed in		Absolute terms			Percentage terms
		What it represents?		Surplus from the project			Point of no profit no loss (Break even point)
		Decision Making		It makes decision making easy.			It does not help in decision making
		Rate for reinvestment of intermediate cash flows		Cost of capital rate			Internal rate of return
		Variation in the cash outflow timing		Will not affect NPV			Will show negative or multiple IRR
		In our case Project-B is better than Project -A if we compare them on NPV bais.
		But if we compare them on IRR bais, then Project-A is better than Project-B