Question

The NPV (net present value) of Plan Alpha is $	(130,539)
The NPV (net present value) of Plan Beta is $	233,001

The IRR (internal rate of return) of Plan Alpha is $	19.36	%.
The IRR (internal rate of return) of Plan Beta is $	21.25	%.

Which​ plan, if​ any, should the company​ pursue?

Based on the results​ above, the company should pursue

Plan Beta

because the NPV is

positive

and the IRR is

greater than

the​ company's required rate of return.

Requirement 2. Explain the relationship between NPV and IRR. Based on this relationship and the​ company's required rate of​ return, are your answers as expected in Requirement​ 1? Why or why​ not?

The internal rate of return is the interest rate that makes the net present value of an investment

▼

​Thus, if an​ investment's net present value is​ positive, the internal rate of return is

▼

the required rate of return and if the net present value is​ negative, the internal rate of return is

▼

the required rate of return

Answer 1

Requirement 2:

IRR is stated as the discount rate of a project which makes all the present value of cash inflow and outflow indifferent. In other word at a discount rate equals to IRR, NPV of a project is zero. If cost of capital of a company is same as that of IRR of the project then NPV of the project is zero. For higher cost of capital than IRR, NPV is negative. For a lower cost of capital than IRR of the project, NPV of the project is positive and it is acceptable. Hence based on the relation between NPV, IRR and company’s required rate of return, the answers are as expected in the above requirement 1.

The internal rate of return is the interest rate that makes the net present value of an investment zero. Thus, if an investment’s net present value is positive, the internal rate of return is higher than required rate of return and if net present value is negative, the internal rate of return is lower than required rate of return.