You are choosing between two projects. The cash flows for the projects are given

Question

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 Year 4 A negative $ 48$48 $ 23$23 $ 21$21 $ 19$19 $ 15$15 B negative $ 99$99 $ 18$18 $ 42$42 $ 52$52 $ 62$62 a. What are the IRRs of the two projects? b. If your discount rate is 4.6 %4.6%, what are the NPVs of the two projects? c. Why do IRR and NPV rank the two projects differently? You are choosing between two projects. The cash flows for the projects are given in the following table ($ million): Project Year 0 Year 1 Year 2 Year 3 Year 4 A negative $ 48$48 $ 23$23 $ 21$21 $ 19$19 $ 15$15 B negative $ 99$99 $ 18$18 $ 42$42 $ 52$52 $ 62$62 a. What are the IRRs of the two projects? b. If your discount rate is 4.6 %4.6%, what are the NPVs of the two projects? c. Why do IRR and NPV rank the two projects differently? You are choosing between two projects. The cash flows for the projects are given in the following table ($ million): Project Year 0 Year 1 Year 2 Year 3 Year 4 A negative $ 48$48 $ 23$23 $ 21$21 $ 19$19 $ 15$15 B negative $ 99$99 $ 18$18 $ 42$42 $ 52$52 $ 62$62 a. What are the IRRs of the two projects? b. If your discount rate is 4.6 %4.6%, what are the NPVs of the two projects? c. Why do IRR and NPV rank the two projects differently? You are choosing between two projects. The cash flows for the projects are given in the following table ($ million): Project Year 0 Year 1 Year 2 Year 3 Year 4 A negative $ 48$48 $ 23$23 $ 21$21 $ 19$19 $ 15$15 B negative $ 99$99 $ 18$18 $ 42$42 $ 52$52 $ 62$62 a. What are the IRRs of the two projects? b. If your discount rate is 4.6 %4.6%, what are the NPVs of the two projects? c. Why do IRR and NPV rank the two projects differently? You are choosing between two projects. The cash flows for the projects are given in the following table ($ million): Project Year 0 Year 1 Year 2 Year 3 Year 4 A negative $ 48$48 $ 23$23 $ 21$21 $ 19$19 $ 15$15 B negative $ 99$99 $ 18$18 $ 42$42 $ 52$52 $ 62$62 Project Year 0 Year 1 Year 2 Year 3 Year 4 A negative $ 48$48 $ 23$23 $ 21$21 $ 19$19 $ 15$15 B negative $ 99$99 $ 18$18 $ 42$42 $ 52$52 $ 62$62 a. What are the IRRs of the two projects? b. If your discount rate is 4.6 %4.6%, what are the NPVs of the two projects? 4.6 %4.6%, NPVs c. Why do IRR and NPV rank the two projects differently?

Explanation / Answer

Project A

NPV = 22.31

IRR = 24.64%

Project B:

NPV = 53.82

IRR = 22.27%

c. project B is a high investment project and even though the rate of return is lesser, it is based on a higher investment. So the absolute return in terms of NPV is higher

4.60% Cash flows Year Discounted CF                  (48.00) 0 -48.00                     23.00 1 21.99                     21.00 2 19.19                     19.00 3 16.60                     15.00 4 12.53

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