Question

Question 1-- NPV Profiles: Graph the NPV profiles for both projects on a common chart., making sure you identify the "crucial" points.

0 -$725 -$850

1 100 200

2 250 200

3 250 200

4 200 200

5 100 200

6 100 200

7 100 200

Note: First column is time, second column is Project A cash flow , third column is Project B flow. This is a two-part question. Answer for first ? is needed to solve ? 2.

Question 2-- IRR Applicability:For what range of possible interest rates would you want to use IRR to choose between the those to projects? For what range would you NOT want to use IRR?

Answer 1

(1): For NPV computations I have computed the PVs using the present value interest factor (PVIF). PVIF = 1/(1+r)^n where r is the discount rate and n is the year of cash flow.

PV = Cash flow in a year*PVIF

For instance when r = 10% then the PVs will be:

Year	Cash flow of A	Cash flow of B	1+r	PVIF	PV of A	PV of B
-	-              725.00	-              850.00	1.1000	1.00000	-    725.00	-    850.00
1.00	100.00	200.00		0.90909	90.91	181.82
2.00	250.00	200.00		0.82645	206.61	165.29
3.00	250.00	200.00		0.75131	187.83	150.26
4.00	200.00	200.00		0.68301	136.60	136.60
5.00	100.00	200.00		0.62092	62.09	124.18
6.00	100.00	200.00		0.56447	56.45	112.89
7.00	100.00	200.00		0.51316	51.32	102.63
				NPV	66.81	123.68

I have computed NPVs for different rates and the NPV profile graph is shown below:

Since the two NPV profiles shown above do not cross in the first quadrant, the only crucial points are the two projects’ IRRs:

For A = 13.00%

For B = 14.29%

(2): Since the two projects’ NPV profiles do not cross in the first quadrant, IRR would work for ALL possible ranges of rates.