Question
You have two mutually exclusive projects that you have been asked to evaluate and make a recommendation. Assume that investors opportunity cost of capital is
You have two mutually exclusive projects that you have been asked to evaluate and make a recommendation. Assume that investors opportunity cost of capital is 8% for both projects. Their cash flow projections are as follows:
|
| Today | Time 1 | Time 2 | Time 3 | Time 4 | Time 5 |
| Investment 1 | -$350,000 | $100,000 | $125,000 | $150,000 | $175,000 | $200,000 |
| Investment 2 | -$650,000 | $50,000 | $175,000 | $300,000 | $375,000 | $500,000 |
Calculate the NPV and IRR of the projects. If you cannot solve for an actual number, write down the expression that you are looking to solve.Why is the NPV of project 2 higher than project 1 yet it has a lower IRR?Explain why your investors would be better off taking the project with the lower rate of return.
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Financial Accounting
Authors: Robert Kemp, Jeffrey Waybright
2nd edition
978-0132771801, 9780132771580, 132771802, 132771586, 978-0133052152
