Question

npv versus irr. here are the cash flows for two mutually exclusive projects: project c0 c1 c2 c3 a –$20,000 $8,000 $8,000 $8,000 b –$20,000 0 0 $25,000 a. at what interest rates would you prefer project a to b? hint: try drawing the npv profile of each project. b. what is the irr of each project?

Answer 1

Project preference based on NPV and IRR calculations depends on the discount rate. For Project A and Project B, calculate the NPV at various rates to determine when they intersect and solve for the IRR for each, which is the rate that makes their NPV zero.

Step-by-step explanation:

When comparing the Net Present Value (NPV) and the Internal Rate of Return (IRR), we assess two mutually exclusive projects (Project A and Project B) with their respective cash flows. The preferability of one project over another at a certain interest rate depends on when the NPV profiles of the two projects intersect.

To answer part A of the question, you need to calculate the NPV's for projects at various discount rates until you find the rate at which both projects have the same NPV. For instance, using the provided information, if the discount rate is 11%, the present value of future cash flows for Project B would be discounted more heavily compared to Project A due to Project B's later cash inflow, possibly making Project A more attractive.

For part B, to find the IRR for each project, you need to solve for the discount rate that makes the NPV equal to zero. You would do separate calculations for Project A and Project B using their specific cash flows.