Question

You are considering the following two projects and can take only one. Your cost of capital is 11.4%. The cash flows for the two projects are as follows (\$ million): 由 .

a. What is the IRR of each project?
b. What is the NPV of each project at your cost of capital?
c. At what cost of capital are you indifferent between the two projects?
d. What should you do? a. What is the IRR of each project?

Answer 1

The IRR of each project can be calculated using the discount rate that makes the NPV of the project equal to zero. Project A has an IRR of 96.08% and Project B has an IRR of 1.64%.

Step-by-step explanation:

The IRR of each project can be calculated by finding the discount rate that makes the NPV of the project equal to zero. For Project A, the cash flows are -$102 million and $200 million, so the IRR is the discount rate that satisfies the equation:

0 = -102/(1+IRR) + 200/(1+IRR)

Solving this equation, we find that the IRR for Project A is approximately 96.08%. Similarly, for Project B, the cash flows are -$183 million and $180 million, so the IRR is the discount rate that satisfies the equation:

0 = -183/(1+IRR) + 180/(1+IRR)

Solving this equation, we find that the IRR for Project B is approximately 1.64%.