Question

You are choosing between two projects. The cash flows for the projects are given in the following table​ ($ million):

Project A B Year 0 - $50 - $99 Year 1 $27 $20 Year 2 $22 $39 Year 3 $19 $52 Year 4 $13 $59

a. What are the IRRs of the two​ projects?

The IRR for project A is ______​%. ​(Round to one decimal​ place.)

The IRR for project B is ______​%. ​(Round to one decimal​ place.)

b. If your discount rate is 4.8 %​, what are the NPVs of the two​ projects?

If your discount rate is 4.8%​, the NPV for project A is $_______.

If your discount rate is 4.8%​, the NPV for project B is $_______.

c. Why do IRR and NPV rank the two projects​ differently?

Answer 1

a.Project A

Internal rate of return can be calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$50. The initial cash flow is indicated by a negative sign since it is a cash outflow.  
• Cash flow for each of the fifteen years should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the IRR and CPT button to get the IRR of the project.

The IRR of the project is 25.93%.

Project B

Internal rate of return can be calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$99. The initial cash flow is indicated by a negative sign since it is a cash outflow.  
• Cash flow for each of the fifteen years should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the IRR and CPT button to get the IRR of the project.

The IRR of the project is 21.47%.

b.Project A

Net present value can be solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$50. Indicate the initial cash flow by a negative sign since it is a cash outflow.  
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the NPV button and enter the discount rate of 4.8%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.  

Net present value at 4.8% discount rate is $23.08.

Project B

Net present value can be solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$50. Indicate the initial cash flow by a negative sign since it is a cash outflow.  
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the NPV button and enter the discount rate of 4.8%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.  

Net present value at 4.8% discount rate is $49.68.

c.The reason that the NPV and IRR approaches rank projects differently is because the NPV and IRR approaches use different reinvestment rate assumptions. NPV reinvests the cash flow at the cost of capital and IRR reinvests cash flows at the internal rate of return.

In case of any query, kindly comment on the solution.