Question

You are choosing between two projects. The cash flows for the projects are given in the following table​ ($ million):

Project	Year 0	Year 1	Year 2	Year 3	Year 4
A	−$51	$24	$18	$21	$17
B	−$102	$21	$38	$49	$61

a. What are the IRRs of the two​ projects?

b. If your discount rate is

5.1%​,

what are the

NPVs

of the two​ projects?

c. Why do IRR and NPV rank the two projects​ differently?

Answer 1

a). calculating the IRR of the two Projects using EXCEL IRR function:-

So, IRR of Project A is 22.00%

IRR of Project B is 19.85%

b). Calculating the NPV of both the Projects taking discount rate as 5.1%:-

Year	Cash Flow ofProject A ($)	Cash Flow of Project B ($)	PV Factor @5.10%	Present Value of Project A ($)	Present Value of Project B ($)
0	(51.00)	(102.00)	1.0000	(51.00)	(102.00)
1	24.00	21.00	0.9515	22.84	19.98
2	18.00	38.00	0.9053	16.30	34.40
3	21.00	49.00	0.8614	18.09	42.21
4	17.00	61.00	0.8196	13.93	49.99
				20.15	44.58

NPV of Project A is $20.15

NPV of Project B is $44.58

c). IRR and NPV rank the two projects differently as both measures Projects differently.

IRR measures return on Investments while NPV seeks for value creation. Thus, they rank projects differntly.

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