Mahjong, Inc., has identified the following two mutually exclusive projects: Yea

Question

Mahjong, Inc., has identified the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) 0 -$43,000 -$43,000 1 23,000 7,000 2 17,900 13,800 3 12,400 24,000 4 9,400 26,000 Question a. What is the IRR for each of these projects? Using 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 NPF for each of these projects? Which project will the company choose if it applies the NPV decision rule?

Explanation / Answer

IRR A = 20.442% IRR B = 18.8366 Using IRR rule, project A NPV A = 7,507.6 NPV B = 9,182.3 Using NPV rule, project B

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