Question

14) Cedric is considering between two mutually exclusive projects. The following table gives the cash flows of each project: 0 1 2 3 4 A -$50 25 20 20 15 B -$100 20 40 50 60 a. If your discount rate is 6%, what are the NPVs of the two projects? b. What are the IRRs of the two projects? c. Why do IRR and NPV rank the two projects differently? NPV IRR

Answer 1

NPV = -initial investment + PV of future cash flows

Present value = Future value/(1+i)^n

i = interest rate per period

n= number of periods

a)

NPV of A= -50 + 25/1.06 + 20/1.06^2 + 20/1.06^3 + 15/1.06^4

= 20.06

NPV of B = -100 + 20/1.06 + 40/1.06^2 + 50/1.06^3 + 60/1.06^4

= 43.97

b)

IRR is the rate at which NPV is zero

using excel IRR function

IRR of A = 24%

IRR of B = 21.03%

c)

Since NPV is takes net profit generated from cash flows where as IRR considers the project return given the cost