Question

Based on the following scenario, which project do you support if you make a decision based on the IRR alone?  

Project A requires an initial investment (or you may say, ‘cash outflow’) of $525,000 and is expected to generate the following net cash inflows:

Year 1: $120,000

Year 2: $110,000

Year 3: $120,000

Year 4: $110,000

Year 5: $120,000

Year 6 : $130,000

The expected rate of return is 5%.

Project B also requires an initial investment (or you may say, ‘cash outflow’) of $525,000 and is expected to generate the following net cash inflows:

Year 1: $300,000

Year 2: $200,000

Year 3: $90,000

Year 4: $0

Year 5: $0

Year 6 : $0

The expected rate of return is 5%.

Project A

OR

Project B

CORRECT ANSWER=PROJECT A

I just need to know the real reason why please.

Answer 1

Initial investmetn
year	cash flow
0	($525,000)	IRR= IRR(B4:B10,5%)		year	cash inflow		present value of $1 @9%	present value of cash flow
1	$120,000	9%		1	1	120000	0.917	110040
2	$110,000			2	2	110000	0.841	92510
3	$120,000			3	3	120000	0.772	92640
4	$110,000			4	4	110000	0.708	77880
5	$120,000			5	5	120000	0.649	77880
6	$130,000			6	6	130000	0.596	77480
							PV	528430
						less	Initial investment	525000
							NPV	3430
year	cash flow	IRR(B4:B10,5%)			cash inflow		present value of $1 @7%	present value of cash flow
0	($525,000)				1	300000	0.934	280200
1	$300,000	7%			2	200000	0.873	174600
2	$200,000				3	90000	0.816	73440
3	$90,000				4	0	0.762	0
4	$0				5	0	0.712	0
5	$0				6	0	0.666	0
6	$0						PV	528240
						less	Initial investment	525000
							NPV	3240
IRR represents that PV- initial investment=0 or nearest 0 in this situation project B is good but regarding more cash inflow
will be generating in project A . As you can see that after 3rd year project B is not generating any cash inflow but project A is
generation good amount of cash inflow and project A is also having more IRR than project B so project A should be choosen.