Question

5) You are choosing between two projects, but can only take one. The cash flows for the projects are given in the following table:

	0	1	2	3	4
A	-50	25	20	20	15
B	-100	20	40	50	60

a. What are the IRRs of the two projects? Use an excel spread sheet

b. If your discount rate is 5%, what are the NPVs of the two projects?

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

Answer 1

c)

As the two projects have different sizes, with Project B the larger of the two projects, the NPV of the project will be greater than A. The IRR of A is greater than B because of the return generated with smaller cash flows.

Formulae