Mr. Cyrus Clops, the president of Giant Enterprises, has to make a choice between two possible investments:
Cash Flows($ thousands) | ||||
Project | C0 | C1 | C2 | IRR(%) |
A | −400 | +250 | +300 | 23 |
B | −200 | +140 | +179 | 36 |
The opportunity cost of capital is 9%. Mr. Clops is tempted to take B, which has the higher IRR.
a. Explain to Mr. Clops why this is not the correct procedure.
b. Show him how to adapt the IRR rule to choose the best project.
c. Show him that this project also has the higher NPV.
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