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 $ 50−$50	$ 23$23	$ 18$18	$ 22$22	$ 14$14
B	negative $ 100−$100	$ 18$18	$ 41$41	$ 48$48	$ 62$62

a. What are the IRRs of the two​ projects?

b. If your discount rate is 4.9 %​, 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.)

Answer 1

a.Project A

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

• •   Press the CF button.
• •   CF0= -$50. Indicate the initial cash flow by 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 button and enter the interest rate to get the IRR of the project.

The IRR is 21.86%.

Project B

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

• •   Press the CF button.
• •   CF0= -$100. Indicate the initial cash flow by 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 button and enter the interest rate to get the IRR of the project.

The IRR is 20.51%.

b. Project A

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

• •   Press the CF button.
• •   CF0= -$50. Indicate the initial cash flow by 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 NPV button and enter the discount rate of 4.9%.
• •   Press enter after that. Press the down arrow and CPT buttons to get the net present value.

The net present value is $18.90.

Project B

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

• •   Press the CF button.
• •   CF0= -$100. Indicate the initial cash flow by 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 NPV button and enter the discount rate of 4.9%.
• •   Press enter after that. Press the down arrow and CPT buttons to get the net present value.

The net present value is $47.30.

c. NPV and IRR rank the two projects differently because the NPV and IRR approaches use different reinvestment rate assumptions and the criteria for project acceptance is also different.

In case of any query, kindly comment on the solution.