Green Grocers is deciding among two mutually exclusive projects. The two project
ID: 2699928 • Letter: G
Question
Green Grocers is deciding among two mutually exclusive projects. The two projects have the following cash flows:
Project A Project B
Year Cash Flow Cash Flow
0 -$50,000 -$30,000
1 10,000 6,000
2 15,000 12,000
3 40,000 18,000
4 20,000 12,000
The company%u2019s weighted average cost of capital is 10 percent (WACC = 10%). What is the net present value (NPV) of the project with the highest internal rate of return (IRR)?
Explanation / Answer
NPV with WACC
NPV of project A = 10000/1.1 + 15000/1.1^2 + 40000/1.1^3 + 20000/1.1^4 - 50000 = $15200.46
NPV of project B = 6000/1.1 + 12000/1.1^2 + 18000/1.1^3 + 12000/1.1^4 - 30000 = $7091.73
IRR of Project A = 21.38%
IRR of Project B= 19.28%
NPV with highest IRR
NPV of project A = 0
NPV of project B = 6000/1.2138 + 12000/1.2138^2 + 18000/1.2138^3 + 12000/1.2138^4 - 30000 = -$1318.21
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