P 8-26 (similar to) Question Help You are choosing between two projects. The cas

Question

P 8-26 (similar to) Question Help You are choosing between two projects. The cash flows for the projects are given in the following table (S million) Year 2 $20 $38 Project Year 0 - $49 - $98 Year 1 $25 $21 Year 3 $22 $52 Year 4 $13 $62 a. What are the IRRs of the two projects? b. If your discount rate is 5.2%, what are the NPVs of the two projects? c. Why do IRR and NPV rank the two projects differently? a. What are the IRRs of the two projects? The IRR for project A is | %. (Round to one decimal place.)

Explanation / Answer

Project A:

CF0 = -49

CF1 = 25

CF2 = 20

CF3 = 22

CF4 = 13

49 = 25/ (1 + r) + 20/ (1 + r)2 + 22/(1 + r)3 + 13/(1 + r)4

r = 25.5%

Project B:

CF0 = -98

CF1 = 21

CF2 = 38

CF3 = 52

CF4 = 62

98 = 21/ (1 + r) + 38/ (1 + r)2 + 52/(1 + r)3 + 62/(1 + r)4

r = 22.6%

Project A will choosen

NPV

Project A:

CF0 = -49

CF1 = 25

CF2 = 20

CF3 = 22

CF4 = 13

Discount Rate = 5.2%

NPV = - 49 + 25/ (1 + 5.2%) + 20/ (1 + 5.2%)2 + 22/(1 + 5.2%)3 + 13/(1 + 5.2%)4

NPV = 22.35%

Project B:

CF0 = -98

CF1 = 21

CF2 = 38

CF3 = 52

CF4 = 62

Discount Rate = 5.2%

NPV = - 98 + 21/ (1 + 5.2%) + 38/ (1 + 5.2%)2 + 52/(1 + 5.2%)3 + 62/(1 + 5.2%)4

NPV = 51.58

Project B will choosen

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