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	-$51	$26	$18	$22	$12
B	-$102	$18	$40	$51	$58

b. If your discount rate is 4.8 %​, what are the NPVs of the two​ projects? a. What are the IRRs of the two​ projects?

c. Why do IRR and NPV rank the two projects​ differently?

Answer 1

a.Project A

Net present value is calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$51. It is entered with a negative sign since it is a cash outflow.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the third cash flow cash flow, press the NPV button and enter the discount rate of 4.8%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.

The net present value of cash flows is $19.26.

Project B

Net present value is calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$102. It is entered with a negative sign since it is a cash outflow.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the third cash flow cash flow, press the NPV button and enter the discount rate of 4.8%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.

The net present value of cash flows is $43.99.

b.Project A

Internal rate of return is calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$51. It is entered with a negative sign since it is a cash outflow.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the IRR and CPT button to get the IRR of the project.

The IRR of project is 21.93%.

Project B

Internal rate of return is calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$102. It is entered with a negative sign since it is a cash outflow.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the IRR and CPT button to get the IRR of the project.

The IRR of project is 19.24%.

c.IRR and NPV rank projects differently is because the NPV and IRR approaches use different reinvestment rate assumptions. NPV reinvests the cash flow at the cost of capital and IRR reinvests cash flows at the internal rate of return.

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