Question

Consider the following two investment projects:

Project A: it has an initial cost of 20,000 euros and requires additional investments of 5,000 euros at the end of the first year and 15,000 euros at the end of the second. This project is two years old and generates 20,000 euros per year in income.

Project B: it has an initial cost of 20,000 euros and requires an additional investment of 10,000 euros at the end of the first year. This project is one year old and generates 32,000 euros of income at the end of the project.

If we consider an interest rate of 5%, the NPV of said projects presents the following values:

Project A: NPV = -1,179.15 euros

Project B: NPV = 952.38

Regarding the value of the IRR:

Project A: IRR = 0%

Project B: IRR = 10%

a) Based on the NPV value, calculated with a market interest rate 5%, which of the two projects is the most recommended? Explain the reasons and causes that make one project more profitable than another.

b) Considering the values ​​in relation to the IRR of each of the projects, are the two projects executable and if so, which of the two is more recommended?

Answer 1

NPV:

Project A = -$1179.14

Project B = $952.38

IRR:

Project A = -5.19%

Project B = 14.17%

a) Based on the NPV value, calculated with a market interest rate 5%, which of the two projects is the most recommended? Explain the reasons and causes that make one project more profitable than another.

Project B is most recommended project as it has positive NPV.

The main reason behind one project profitable than other because of the time at which cash flow is received and because of the time value of money. the value of a cash flow received today will have higher value than the same cash flow received a year now.

b) Considering the values ​​in relation to the IRR of each of the projects, are the two projects executable and if so, which of the two is more recommended?

Project B is most recommended project as it has higher IRR.

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