Question

The company is considering two mutually exclusive investments in plant expansion projects. The projects’ expected net cash flows are as follows:

	Expected Net Cash Flows
Year	Project A	Project B
0	-9,000	-7,000
1	2,000	3,000
2	4,000	3,000
3	6,000	3,000

1. Construct NPV profiles for Projects A and B assuming that each project’s cost of capital is 10%.
2. What is each project’s IRR?
3. Which project should be selected?
   1. Rank the projects according to their NPV
   2. Rank the projects according to their IRR

Answer 1

NPV of the project A and project B is computed as follows-

IRR of project A and project B is computed as follows-

According to NPV analysis Project A should be selected as it has higher NPV than the Project B.

According to IRR analysis Project B should be selected as it has higher IRR than the Project A.