In case of nutually exclsuive Projects, Better Project is the Project with higher NPV.
NPV = PV of Cash Inflows - PV of Cash Outflows.
NPV of Project S:
Year | CF | PVF@8% | Disc CF |
0 | $ -1,000.00 | 1.0000 | $ -1,000.00 |
1 | $ 890.56 | 0.9259 | $ 824.59 |
2 | $ 250.00 | 0.8573 | $ 214.33 |
3 | $ 10.00 | 0.7938 | $ 7.94 |
4 | $ 10.00 | 0.7350 | $ 7.35 |
NPV | $ 54.22 |
NPV of Project L:
Year | CF | PVF@8% | Disc CF |
0 | $ -1,000.00 | 1.0000 | $ -1,000.00 |
1 | $ - | 0.9259 | $ - |
2 | $ 250.00 | 0.8573 | $ 214.33 |
3 | $ 400.00 | 0.7938 | $ 317.53 |
4 | $ 799.39 | 0.7350 | $ 587.58 |
NPV | $ 119.44 |
Project L is better Project as it has higher NPV.
IRR is the Rate at which PV of Cash Inflows are equal to PV of Cash outflows.
Year | CF | PVF@11% | Disc CF | PVF@12% | Disc CF |
0 | $ -1,000.00 | 1.0000 | $ -1,000.00 | 1.0000 | $ -1,000.00 |
1 | $ - | 0.9009 | $ - | 0.8929 | $ - |
2 | $ 250.00 | 0.8116 | $ 202.91 | 0.7972 | $ 199.30 |
3 | $ 400.00 | 0.7312 | $ 292.48 | 0.7118 | $ 284.71 |
4 | $ 799.39 | 0.6587 | $ 526.58 | 0.6355 | $ 508.03 |
NPV | $ 21.97 | $ -7.96 |
IRR = Rate at which least +ve NPV + [ NPV ast that Rate / Change in NPV due to 1% inc in disc rate ] * 1%
= 11% + [ 21.97 / 29.93 ] * 1%
= 11% + 0.73%
= 11.73%
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