Question

Brian Cliff is evaluating two mutually exclusive projects
                   (expected cash flows shown below). The firm's cost of capital is 12.25 percent.                              
                                                Year                Project A             Project B
                                                   0                       (600)                                      (600)
                                                   1                           200                                        400
                                                   2                           310                                        260  
                                                   3                           400                                        100
                                                                NPV?                     _____                                   _____

                                                                IRR?                       _____                                   _____

                Calculate the NPVs and IRRs for Projects A and B.

Project A's NPV is $107.02, and Project B's NPV is $33.40.

Project A's NPV is greater than Project B's NPV by 76.04.

Project A's NPV is greater than Project B's NPV by 72.43.

Project A's IRR is 21.27 percent, and Project B's IRR is 18.70 percent.

Answer 1

Project A
Discount rate	0.1225
Year	0	1	2	3
Cash flow stream	-600	200	310	400
Discounting factor	1	1.1225	1.260006	1.414357
Discounted cash flows project	-600	178.1737	246.0305	282.814
NPV = Sum of discounted cash flows
NPV Project A =	107.02
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
Project B
Discount rate	0.1225
Year	0	1	2	3
Cash flow stream	-600	400	260	100
Discounting factor	1	1.1225	1.260006	1.414357
Discounted cash flows project	-600	356.3474	206.3482	70.70351
NPV = Sum of discounted cash flows
NPV Project B =	33.4
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
Project A
IRR is the rate at which NPV =0
IRR	0.212697674
Year	0	1	2	3
Cash flow stream	-600	200	310	400
Discounting factor	1	1.212698	1.470636	1.783436
Discounted cash flows project	-600	164.9216	210.7932	224.2861
NPV = Sum of discounted cash flows
NPV Project A =	0.000869733
Where
Discounting factor =	(1 + IRR)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
IRR=	21.27%
Project B
IRR is the rate at which NPV =0
IRR	0.162659007
Year	0	1	2	3
Cash flow stream	-600	400	260	100
Discounting factor	1	1.162659	1.351776	1.571655
Discounted cash flows project	-600	344.039	192.3396	63.62722
NPV = Sum of discounted cash flows
NPV Project B =	0.005743172
Where
Discounting factor =	(1 + IRR)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
IRR=	16.27%