Question

9. The Ott Group, Inc., has identified the following two mutually exclusive projects: Year 0 Cash Flow (S) - $12,500 4,000 5,000 6,000 1,000 Cash Flow (L) - $12,500 1,000 6,000 5,000 4,000 a. What is the IRR for each of these projects? If you apply the IRR decision rule, which project should the company accept? b. If the required return is 11 percent, what is the NPV for each of these projects? Which project will you choose if you apply the NPV decision rule?

Answer 1

	S	L
IRR	11.85%	9.53%
NPV	-451.14	-3073.41

a: As per IRR rule, select the one which has greater IRR which is more than the cost of capital. Hence Project S will be chosen.

b: As per NPV rule reject both since both have negative NPV.

Year	S	L
0	-12500	-12500
1	4000	1000
2	5000	6000
3	6000	5000
4	1000	4000

AutoSave © of HO- Book1 - Excel Sign in - o X File Home Insert Draw Page Layout Formulas Data Review View Help O Tell me what you want to do Share Comments Av = = open alle Calibri -10 BI U - 8 - - A À = - A - E General $ - % , eo mo Insert - Delete - Format T- Paste - Conditional Format as Formatting Table Cell Styles - Sort & Find & Filter - Select Font Alignment Number Styles Cells Editing Clipboard C2 - : x V fir -12500 А в 1 Year S am to 000 -12500 4000 5000 6000 1000 -12500 1000 6000 5000 4000 IRR NPV =IRR(C2:06) =NPV(11%,C3:C5)+C2 =IRR(D2:06) =NPV(11%,D3:D5)+D2 10 11 12 13 14 15