Question

                PROJECT A           PROJECT B

Initial Outlay      -50000   -70000

Inflow year 1      12000    13000

Inflow year 2      12000    13000

Inflow year 3      12000    13000

Inflow year 4      12000    13000

Inflow year 5      12000    13000

Inflow year 6      12000    13000

​​(​NPV, ​PI, and IRR calculations​) You are considering two independent​ projects, project A and project B. The initial cash outlay associated with project A is ​$50000​, and the initial cash outlay associated with project B is ​$70000. The required rate of return on both projects is 10 percent. The expected annual free cash inflows from each project are in the chart above.... Calculate the NPV​, PI​, and IRR for each project and indicate if the project should be accepted.

Answer 1

Calculation of NPV, PI and IRR for project A
Year	Cashflows ($)	Discounting factor @ 10%	PV of cashflows	Discounting factor @ 11.5305%	PV pf cashflows
0	-50000	1	-50000	1	-50000
1	12000	0.909090909	10909.09091	0.896615724	10759.38869
2	12000	0.826446281	9917.355372	0.803919756	9647.037077
3	12000	0.751314801	9015.777611	0.720807094	8649.685133
4	12000	0.683013455	8196.161464	0.646286975	7755.443697
5	12000	0.620921323	7451.055877	0.579471064	6953.652765
6	12000	0.56447393	6773.687161	0.519562867	6234.754408
		NPV	2263.128394		0
NPV= Present value of cashflows from the project discounted at the required rate of return
		$2,263.13	See table
IRR= rate of return where NPV is zero. By trial and error, the IRR of the project= 11.5305%
PI= (NPV+Initial investment)/Initial investment
		(2263.13+50000)/50000
		1.0452626
Calculation of NPV, PI and IRR for project B
Year	Cashflows ($)	Discounting factor @ 10%	PV of cashflows	Discounting factor @ 3.1823%	PV pf cashflows
0	-70000	1	-70000	1	-70000
1	13000	0.909090909	11818.18182	0.96915847	12599.06011
2	13000	0.826446281	10743.80165	0.93926814	12210.48582
3	13000	0.751314801	9767.092412	0.910299673	11833.89576
4	13000	0.683013455	8879.17492	0.882224639	11468.9203
5	13000	0.620921323	8071.9772	0.855015481	11115.20125
6	13000	0.56447393	7338.161091	0.828645496	10772.39144
		NPV	-13381.61091		0
NPV= Present value of cashflows from the project discounted at the required rate of return
		($13,381.61)	See table
IRR= rate of return where NPV is zero. By trial and error, the IRR of the project= 3.1823%
PI= (NPV+Initial investment)/Initial investment
		(-13381.61+50000)/50000
		0.7323678
As the NPV of project A is positive so the same should be accepted and Project B should be rejected (as NPV is negative)