Question

The manager of FIRN is evaluating two mutually exclusive projects. The costs and expected cash flows are given in the following table. The appropriate discount rate is 11.5% per annum.

Years	Project X	Project Y
0	-$300,000	-$350,000
1	$150,000	$150,000
2	$150,000	$150,000
3	$250,000	$200,000
4	$80,000	$200,000
5	$80,000	$200,000
IRR	42.2%	39.3%

1. Calculate the projects’ net present value (NPV). Identify which project should be accepted under the rule of NPV. Explain your answer.      

2. What is the decision based on the internal rate of return (IRR)?

3. Calculate the crossover rate/incremental IRR, at which the NPV profiles for Projects A and B intersect.

4. Which project should be accepted based on your answer in part (iii)? Explain your answer.

Answer 1

Question 1:

Question 2:

IRR of Project A is 42.2%

IRR of Project B is 39.3%

Project A should be accepted since IRR of Project A is higher than Project B

Question 3: