Your company is considering two mutually exclusive projects---C and R whose cost

Question

Your company is considering two mutually exclusive projects---C and R whose costs and cash flows are shown in the following table:
Year       Project C               Project R
0           $(14,000)               $(22,840)
1                8,000                     8,000
2                6,000                     8,000
3                2,000                     8,000
4                3,000                     8,000
The projects are equally risky and their required rate of return is 12 percent. You must make a recommendation concerning which project should be purchased. To determine which is more appropriate, compute the NPV and IRR of each project.

Explanation / Answer

Rate = 12% NPV = CF0+ NPV(Rate,CF1, CF2,Cf3,Cf4) Proj 'C': NPVc= -14000+ NPV(12%,8000,6000,2000,3000) ie NPVc = -14000+ $15,256.14 ie NPVc = $1,256.14 IRR = IRR(CFs) = IRR(-14000,8000,6000,2000,3000) = 17.32% Proj 'R': NPVr= -22840+ NPV(12%,8000,8000,8000,8000) = -22840+$24,298.79 ie NPVr= $1,458.79 IRR = IRR(CFs) = IRR(-22840,8000,8000,8000,8000) = 15.00% Taking NPV as benchmark, we find that Proj C is more appropirate

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