NPV versus IRR. Framing Hanley, LLC, has identified the following two mutually exclusive projects:
Year | Cash Flow (A) | Cash Flow (B) |
0 | −$50,000 | −$50,000 |
1 | 26,000 | 14,000 |
2 | 20,000 | 18,000 |
3 | 16,000 | 22,000 |
4 | 12,000 | 26,000 |
a. What is the IRR for each of these projects? If you’apply the IRR decision rule, which project should the company accept? Is this decision necessarily correct?
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?
c. Over what range of discount rates would you choose Project A? Project B? At what discount rate would you be indifferent between these two projects? Explain.
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