Consider the following two mutually exclusive projects:

Cash Flows ($)

Project C0 C1 C2 C3 A 100 60 60 0 B 100 0 0 140

a. Calculate the NPV of each project for discount rates of 0, 10, and 20%. Plot these on a graph with NPV on the vertical axis and discount rate on the horizontal axis.

b. What is the approximate IRR for each project?

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c. In what circumstances should the company accept project A?

d. Calculate the NPV of the incremental investment (B  A) for discount rates of 0, 10, and 20%. Plot these on your graph. Show that the circumstances in which you would accept A are also those in which the IRR on the incremental investment is less than the opportunity cost of capital.

AppendixLO1