Question

s are given in Prejset ear 3 325 121 548 What are the IRs of the two projt Why do IRR and NPW ank the bwo projects fferently

Answer 1

1) IRR can be calculated using Excel Function

		A	B	C	D	E
	Project	Year 0	Year 1	Year 2	Year 3	Year 4
1	A	-51	25	21	20	13
2	B	-100	18	39	48	59
	IRR of A	22.56%	Using Excel Formula=IRR(A1:E1)
	IRR of B	19.25%	Using Excel Formula=IRR(A2:E2)

IRR of A is 22.56%% and IRR of B is 19.25%

2)NPV of Project A =PV of Cash Flows-Initial Investment =25/(1+4%)+21/(1+4%)^2+20/(1+4%)^3+20/(1+4%)^4-51=27.33
NPV of Project B =PV of Cash Flows-Initial Investment =18/(1+4%)+39/(1+4%)^2+48/(1+4%)^3+59/(1+4%)^4-100=46.47

3) IRR and NPV give conflicting results because IRR assumes reinvestment of cash flows at higher IRR rate whereas NPV assumes reinvestment at cost of capital or WACC which is less than IRR .