Your boss, the chief financial officer $($CFO$)$ for Southern Textiles, has just handed you the estimated cash flows for two proposed projects. Project L involves adding a new item to the firm$$s fabric line. It would take some time to build up the market for this product, so the cash inflows would increase over time. Project S involves an add$-$on to an existing line, and its cash flows would decrease over time. Both projects have $3-$year lives because Southern is planning to introduce an entirely new fabric at that time.

Here are the net cash flow estimates $($in thousands of dollars$)$:

Expected Net Cash Flows

Year Project L Project S

$0$ $$(100)$ $$(100)$

$11070$

$26050$

$38020$

The CFO also made subjective risk assessments of each project, and he concluded that the projects both have risk characteristics that are similar to the firm$$s average project. Southern$$s required rate of return is $10\%.$ You must now determine whether one or both of the projects should be accepted.

d$.(1)$ Define the term net present value $($NPV$).$ What is each project$$s NPV$?$

e$.$ Define the term internal rate of return $($IRR$).$ What is each project$$s IRR?

Internal rate of return is the discount rate that forces the PV of a project$$s cash flows to equal its initial investment.