Question

2) Given the following cash flows for two mutually exclusive projects (S and L), Answer each of the following questions.  To receive full credit you must show your work and clearly label your answers.

Time               0 1 2 3 4

Project S -1,000 500 400 300 100

Project L -1,000 100 300 400 600

1. Calculate the IRR for both projects.
2. Calculate the NPV for both projects using 0, 5, 10 and 15 percent discount rates
3. Draw and label the complete NPV profiles with both projects on a single graph, including the y-axis intercept values, the x-axis intercept values, and the crossover rate
4. Indicate how a conflict can occur between the IRR and NPV decision criteria and show the area of conflict on the graph

Answer 1

Rate	NPV of Project S	NPV of Project L
0%	$300	$400
5%	$180.42	$206.50
10%	$78.82	$49.18
15%	-$8.33	-$80.14

This table shows the NPV value of the project at different rates. The values in the table is calculated using financial calculator.

	Project S	Project L
IRR	14.49%	11.79%

This table shows the value of IRR, which is calculated using financial calculator.

This picture shows the NPV profile of both project S and project L in individual graph. This graph also shows the IRR of both the projects.

The crossover rate is calculated by using financial calculator. In order to calculate the crossover rate , we subtract the cash flow of Project L from Project S.

Inputs: C0= 0

C1= 500 - 100 = 400. Frequency= 1

C2= 400 - 300= 100. Frequency= 1

C3= 300 - 400= -100. Frequency= 1

C4= 100 - 600= -500. Frequency= 1

Irr= compute

We get, IRR as 7.1673% which is also the crossover rate.

A conflict can occur between IRR and NPV when both provide different result i.e. as per Npv we choose Project S and as per IRR we choose project L. The area of conflict is shown by the area circled in the graph given below. The conflict arises at 5% because as per IRR the project S should be chosen and as per NPV the project L should be chosen.

This graph show the Npv profile of both the project , crossover rate and the area of conflict .