Question
You needed to choose between two projects, which each required a $900,000 investment. You could only choose one, and your discount rate was 10%. Here's
You needed to choose between two projects, which each required a $900,000 investment. You could only choose one, and your discount rate was 10%. Here's a reminder of the forecasted cash flows:
| Project A | Project B | |
|---|---|---|
| Year 0 | ($900,000) | ($900,000) |
| Year 1 | $500,000 | $0 |
| Year 2 | $500,000 | $0 |
| Year 3 | $300,000 | $1,670,000 |
The NPV of Project A was $193,160 and the NPV of Project B was $354,700. Finally, now that we understand IRR, you can calculate the two IRRs. The IRR of Project A is 22.9% and the IRR of Project B is 22.9%.
We know that Project B creates more value. What mistakes would you make if you relied on IRR instead of looking at the NPV of the projects?
Step by Step Solution
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The calculations for the NPV and IRR of the two projects For both projects the initial investment is 900000 and the discount rate is 10 For Project A Year 0 900000 Year 1 500000 1 0101 454545 Year 2 5...
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Financial Management Theory and Practice
Authors: Eugene F. Brigham, Michael C. Ehrhardt
15th edition
130563229X, 978-1305632301, 1305632303, 978-0357685877, 978-1305886902, 1305886909, 978-1305632295
