Advanced: Comparison of NPV and IRR Using the discounted cash flow yield (internal rate of return) for evaluating investment opportunities has the basic weakness that it does not give atten¬ tion to the amount of the capital investment, in that a return of 20% on an investment of £1000 may be given a higher ranking than a return of 15% on an investment of £10000.

Comment in general on the above statement and refer in particular to the problem of giving pri¬ orities to (ranking) investment proposals.

Your answers should make use of the following information.

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Project A Project B cash flow cash flow () () Year 0 (Capital investments) 1000 10000 1 Cash flows 240 2300 2 Cash flows 288 2640 3 Cash flows 346 3040 4 Cash flows 414 3 500 5 Cash flows 498 4020 Cost of capital 10% 10% Taxation can be ignored.