Question

This table will cover information for Q1-Q3

year	project A	project B
0	-1000	-900
1	300	240
2	300	240
3	300	240
4	300	240
5	300	240

For above project, interest rate is 10%

Q1 what is NPV of project A

2) q2 what is IRR of project b

3) NPV for A is higher than NPV for project B

True

False

Answer 1

1). NPV = PV of Cash Inflows - PV of Cash Outflows

NPV of A = [$300*{(1-(1+0.10)^-5)/0.10}] - $1000

= [$300*{0.3791/0.10}] - $1000

= [$300*3.7908] - $1000

= $1137.24 - $1000 = $137.24

2). To find the IRR for B, we need to put the following values in the financial calculator:

CF0=-900; C01 =240; F01=5;

Press IRR then CPT, which gives us 10.42

So, IRR for B = 10.42%

3). NPV of B = [$240*{(1-(1+0.10)^-5)/0.10}] - $900

= [$240*{0.3791/0.10}] - $900

= [$240*3.7908] - $900

= $909.79 - $900 = $9.79

Hence, The statement is True, as the NPV for A is indeed higher than that of B.