13. NPV versus IRR. Here are the cash flows for two mutually exclusive projects:

Question

13. NPV versus IRR. Here are the cash flows for two mutually exclusive projects: (LO8-1 and

LO8-2)

Project    C0                        C1                                        C2                             C3

A              -$20,000              +$8,000                                +$8,000                +$ 8,000

B              - 20,000                  0                                       0                           + 25,000

a. At what interest rates would you prefer project A to B? ( Hint: Try drawing the NPV profile

of each project.) . What is the IRR of each project?

Please provide a formula not in an excel sheet

Explanation / Answer

a. We will prefer Project at the Higher Interest rate and Project B at the Lower Interest rate. Example:

At 4% interest rate, the NAV of Project A = 2.775 * 8000 - 20000 = $2200 and of Project B = 0.889 * 25000 - 20000 = $2225, Project B is preferred.

At 6% interest rate, the NAV of Project A = 2.673 * 8000 - 20000 = $1384 and of Project B = 0.840 * 25000 - 20000 = $1000, Project A is preferred.

b. IRR of Project A = 4% + (22200 - 20000) / (22200 - 21384) * (6 - 4)% = 9.39%

IRR of Project B = 4% + (22225 - 20000) / (22225 - 21000) * (6 - 4)% = 7.63%

Related Questions

Navigate

• Browse (All)
• Browse 1
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.