Question

As the director of capital budgeting for EFG Corporation, you are evaluating two mutually exclusive projects with the following net cash flows:

                               Project E Project F

                  Year     Cash Flow     Cash Flow

                   0       -$100,000        -$100,000

                   1          50,000            10,000

                   2          40,000            30,000

                   3          30,000            40,000

                   4          10,000            60,000

If EFG’s cost of capital is 15 percent, What is the NPV and IRR of the better project, respectively??

Answer 1

Year	Project E	Project F
0	$                         (100,000)	$                       (100,000)
1	$                             50,000	$                           10,000
2	$                             40,000	$                           30,000
3	$                             30,000	$                           40,000
4	$                             10,000	$                           60,000
NPV	($724.32)	($6,968.86)
IRR	14.49%	11.79%

Project E is better with NPV of -$724.32 and IRR of 14.49%.