Question
Project Initial Investment Year 1 Cash Flow Year 2 Cash Flow Year 3 Cash Flow IRR A $120,000 $40,000 $50,000 $60,000 20% B $150,000 $55,000
Project | Initial Investment | Year 1 Cash Flow | Year 2 Cash Flow | Year 3 Cash Flow | IRR |
A | $120,000 | $40,000 | $50,000 | $60,000 | 20% |
B | $150,000 | $55,000 | $60,000 | $70,000 | 18% |
The cost of capital is 14%.
a) Compute the NPV for both projects.
b) Which project should be chosen based on NPV and why?
c) Analyze the impact of the higher IRR on the final decision.
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Fundamentals Of Corporate Finance
Authors: Jonathan Berk, Peter DeMarzo, Jarrad Harford
5th Edition
0135811600, 978-0135811603
