You are choosing between two projects but can only take one. The cash flows for the projects are given in the following table: 0 1 2 3 4 A -$50 $25 $20 $20 $15 B -$100 $20 $40 $50 $60

a. What are the IRRs of the two projects? as you cannot calculate you will be provided with the IRRs Project A IRR = 24% Project B IRR = 21%

b. If your discount rate is 5%, what are the NPVs of the two projects?

c. Why do IRR and NPV rank the two projects differently?

Plan: We can compute the IRR by using an approach similar to Eq. 8.3 and then rearranging it so that NPV equals zero and solving for r. Once we compute r, we can compute the NPV of both projects. 0 1 2 3 4 50 25 20 20 15 100 20 40 50 60