Project X Project Y

Year Cash Flow Cash Flow

0 -$1000 -$1000

1 100 400

2 300 400

3 500 400

4 800 400

The cost of capital is 5 percent.

1. What is each projects NPV? Which project would you choose based on NPV rule?

2. What is each projects IRR? Which project would you choose based on IRR rule?

3. Why IRR rule and NPV rule lead to different decisions? Which rule is more appropriate to evaluate mutually exclusive projects? Why?