Question

You are asked to evaluate the following two projects for the Norton corporation. Use a discount rate of 14 percent. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.

Project X (Videotapes of the Weather Report) ($46,000 Investment)						Project Y (Slow-Motion Replays of Commercials) ($66,000 Investment)
Year		Cash Flow				Year		Cash Flow
1		$	23,000			1		$	33,000
2			21,000			2			26,000
3			22,000			3			27,000
4			21,600			4			29,000

Answer 1

We can use Internal rate of return (IRR) and Net present value (NPV) method to evaluate both projects in following manner -

Year (n)	Net cash flow of Project X (Videotapes of the Weather Report) ($46,000 Investment) (CF)	PV = CF/(1+discount rate)^n	Net cash flow of Project Y (Slow-Motion Replays of Commercials) ($66,000 Investment)(CF)	PV = CF/(1+discount rate)^n	Formula used for PV
0	-$46,000	-$46,000.00	-$66,000	-$66,000.00	CF/(1+14%)^0
1	$23,000	$20,175.44	$33,000	$28,947.37	CF/(1+14%)^1
2	$21,000	$16,158.82	$26,000	$20,006.16	CF/(1+14%)^2
3	$22,000	$14,849.37	$27,000	$18,224.23	CF/(1+14%)^3
4	$21,600	$12,788.93	$29,000	$17,170.33	CF/(1+14%)^4
IRR	32.21%		27.39%
NPV (sum of PVs)		$17,972.56		$18,348.08

As the IRR of both projects are more than discount rate of 14%;  therefore both projects are acceptable but project X is better than project Y because of higher IRR.

Net present value (NPV) of both projects are positive  therefore both projects are acceptable but project Y is better than project X because of higher NPV.