Question
You are choosing between two projects. The cash flows for the projects are given in the following table ($ million): Project Year 0 Year 1
You are choosing between two projects. The cash flows for the projects are given in the following table ($ million):
Project | Year 0 | Year 1 | Year 2 | Year 3 | Year 4 |
A | negative $ 49$49 | $ 23$23 | $ 20$20 | $ 22$22 | $ 14$14 |
B | negative $ 101$101 | $ 22$22 | $ 40$40 | $ 48$48 | $ 60$60 |
a. What are the IRRs of the two projects?
b. If your discount rate is
5.1 %5.1%,
what are the
NPVs
of the two projects?
c. Why do IRR and NPV rank the two projects differently?
a. What are the IRRs of the two projects?
The IRR for project A is
nothing%.
(Round to one decimal place.)The IRR for project B is
nothing%.
(Round to one decimal place.)b. If your discount rate is
5.1 %5.1%,
what are the
NPVs
of the two projects?If your discount rate is
5.1 %5.1%,
the NPV for project A is
$nothing
million.
(Round to two decimal places.)If your discount rate is
5.1 %5.1%,
the NPV for project B is
$nothing
million.
(Round to two decimal places.)
c. Why do IRR and NPV rank the two projects differently? (Select from the drop-down menus.)
NPV and IRR rank the two projects differently because they are measuring different things.
NPVNPV
IRRIRR
is measuring value creation, while
NPVNPV
IRRIRR
is measuring return on investment. Because returns do not scale with different levels of investment, the two measures may give different rankings when the initial investments are different.
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