NPV vs. IRR. Garage, Inc. has identified the following two mutually exclusive pr
ID: 2767784 • Letter: N
Question
NPV vs. IRR. Garage, Inc. has identified the following two mutually exclusive project
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 NPV for each of these projects? Which project will the company choose if it applies the NPV decision rule?
Year
Cash Flow (A)
Cash Flow (B)
0
-$29,000
-$29,000
1
14,400
4,300
2
12,300
9,800
3
9,200
15,200
4
5,100
16,800
Year
Cash Flow (A)
Cash Flow (B)
0
-$29,000
-$29,000
1
14,400
4,300
2
12,300
9,800
3
9,200
15,200
4
5,100
16,800
Explanation / Answer
Calculation of the IRR of the project NPV at 11% NPV = Present value of cash inflows- outflows From the annuity table NPV = 14400*.900+12300*.811+9200*.731+5100*.657-29000 12973+9983+6727+3360-29000 NPV = $4,042 NPV at 20% NPV = 14400*.833+12300*.694+9200*.579+5100*.483-29000 12000+8542+5324+2460-29000 ($675) IRR = Lower Rate+ NPV at Lower rate/ NPV at Lower Rate- NPV at Higher Rate ( HR-LR) 11+4042/4042+675(20-11) 11+7.71 IRR = 11.71% Project B NPV at 11% NPV = 4300*.900+9800*.811+15200*.731+16800*.657-29000 3874+7954+11114+11067-29000 NPV = $5,008 NPV at 20% NPV = 4300*.833+9800*.694+15200*.579+16800*.483-29000 3583+6805+8796+8102-29000 ($1,713) IRR = 11+5008/5008+1713*(20-11) 11+6.70 17.70% Project B should be selected
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