Question

Better Health, Inc. is evaluating two investment projects, each of which requires an up-front expenditure of $2.5 million. The projects are expected to produce the following net cash inflows: Year Project A Project B 1 750,000 2,000,000 2 1,250,000 1,250,000 3 2,000,000 750,000 a. What is each project's IRR? Project A = IRR(C11: b. What is each project's NPV if the cost of capital is 10%?

Attention Chegg Tutor: There is a similar answer online in Chegg, but the excel formula doesn't make sense. So please do not copy and paste the answer to answer this question. I am really trying to understand how the answer came about. please show all work.

Answer 1

IRR is the rate of return at which if discount the future inflow of a project the total of pv of all inflows becomes equal to pv of all outflows or in other words we can say that npv becomes zero
CALCULLATION OF IRR OF PROJECT A
HOW SOLVED
for getting the IRR we have discounted the inflow of project A at different rate of reture i.e. @30%, @40% and @45%
from this I comes to know that NPV of Project A becomes ZERO in between some where @40% and @45%
after this by approximisation method we have calculated the IRR that is
CALCULLATION OF IRR OF PROJECT A
YEAR	CASH INFLOW	TAKING PV @30%		TAKING PV @40%		TAKING PV @ 45%
1	1750000	0.769	1345750	0.714	1249500	0.69	1207500
2	1250000	0.592	740000	0.51	637500	0.476	595000
3	2000000	0.455	910000	0.364	728000	0.328	656000
			2995750		2615000		2458500
	HERE	=R1=.40	PV FACTOR 40%
		=R2=.45	PV FACTOR 45%
	NOW IRR	=R1+(R2-R1)*(PV@R1-250000)/PV@R1-PV@R2
		=.40+{.45-.40)*(2615000-2500000)/2615000-2458500)
		=.40+.05*115000/156500
		=.40+.0367
		=4367
		OR IN 43.67%
CALCULLATION OF IRR OF PROJECT B
HOW SOLVED
for getting the IRR we have discounted the inflow of project A at different rate of reture i.e. @20%, @30% and @35%
from this I comes to know that NPV of Project A becomes ZERO in between some where @30% and @35%
after this by approximisation method we have calculated the IRR that is =R1+(R2-R1)*(PV@R1-INITIAL INVESTMENT)/PV@R1-PV@R2
YEAR	CASH INFLOW	TAKING PV @20%		TAKING PV @30%		TAKING PV @35%
1	2000000	0.833	1666000	0.769	1538000	0.741	1482000
2	1250000	0.694	867500	0.592	740000	0.549	686250
3	750000	0.578	433500	0.455	341250	0.406	304500
					2619250		2472750
	HERE	=R1=.30	PV FACTORE 30%
		=R2=35	PV FACTORE 35%
	NOW IRR	=R1+(R2-R1)*(PV@R1-250000)/PV@R1-PV@R2
		=.30+{.35-.30)*(2619250-2500000)/2619250-2472750)
		=.30+.05*119250/146500
		=.30+.0406
		=3406
		OR IN 34.06%
CALCULATIN OF NPV @10PV FACTOR OF BOTH PROJECT A AND PROJECT B
	PROJECT A			PROJECT B
YEAR	CASH INFLOW	TAKING PV @10%		CASH INFLOW	TAKING PV @10%
1	1750000	0.909	1590750	2000000	0.909	1818000
2	1250000	0.826	1032500	1250000	0.826	1032500
3	2000000	0.751	1502000	750000	0.751	563250
			4125250			3413750
LESS INITIAL INVESTMENT AT 0 YEAR			2500000			2500000
SO NPV AT 10% PV FACTOR IS			1625250			913750