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You are choosing between two projects, but can only take one. The cash flows for the projects

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You are choosing between two projects, but can only take one. The cash flows for the projects are given in the following table:


You are choosing between two projects, but can only take


a. What are the IRRs of the two projects?
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?

Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...
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A $50 25 B $ 20 20 15 100 20 40

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a IRR of Investment A 24 IRR of Investment B 21 b NPV of Investment A at 5 2157 NPV o...View the full answer


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Fundamentals of Corporate Finance

Fundamentals of Corporate Finance

ISBN: 978-0132148238

2nd edition

Authors: Berk, DeMarzo, Harford

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Related Video

NPV stands for \"Net Present Value,\" which is a financial concept used to determine the value of an investment or project. It measures the difference between the present value of cash inflows and the present value of cash outflows over a given period of time, using a specific discount rate. To calculate the NPV of an investment, you need to first estimate the cash inflows and outflows associated with the investment, and then discount them back to their present values using a discount rate. The discount rate represents the cost of capital or the expected rate of return required by investors. The formula for calculating NPV is: NPV = sum of (cash inflows / (1 + discount rate)^t) - sum of (cash outflows / (1 + discount rate)^t) Where: Cash inflows: the expected cash received from the investment Cash outflows: the expected cash paid out for the investment Discount rate: the required rate of return or the cost of capital t: the time period in which the cash flow occurs If the NPV is positive, it means that the investment is expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a good investment. If the NPV is negative, it means that the investment is not expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a bad investment.

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