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Question: You are choosing between two projects. The cash flows for the projects are given in the following...
You are choosing between two projects. The cash flows for the projects are given in the following table ($ million):
Project
Year 0
Year 1
Year 2
Year 3
$19
$12
B
$99
$18
$39
$51
$59
a. What are the IRRs of the two projects?
b. If your discount rate is 4.7%, what are the NPVs of the two projects?
c. Why do IRR and NPV rank the two projects differently?
Project
Year 0
Year 1
Year 2
Year 3
A -50 24 21$19
$12
B
$99
$18
$39
$51
$59
Explanation / Answer
Project A:
IRR = 21.59%
NPV = 18.62
Project B:
IRR = 20.47%
NPV = 47.30
c. The second project has a higher investments with cash returns making the NPV higher. However in relation to the cash outlay, the inflows for A is higher and earlier, so the IRR for A is higher.
4.70% Cash flows Year Discounted CF (50.00) 0 -50.00 24.00 1 22.92 21.00 2 19.16 19.00 3 16.55 12.00 4 9.99Related Questions
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