Question

Decide which project the most profitable is by:

(a) Determining the NPV at a discount rate of 6.5%. (8 marks)
(b) The IRR. ?
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Answer 1

Project A :

NPV : $703,888.64

IRR : 44.882%

Project B:

NPV : $5,241.26

IRR : 49.662%

Project B is more profitable

Explanation:

The NPV gives the difference between the present value of cash inflow and cash outflow over a certain period of time.

The Internal rate of return is the discount rate which makes the NPV of an investment 0. It is used to estimate the potential return on an investment. Investments with higher IRR are said to be better than those with lower IRR value.

Using the net present value, (NPV) Calculator, the NPV for project A is : $703,888.64

The IRR of project A is : 44.882%

The NPV for Project B is : $5,241.26

The Internal rate of return (IRR) : 49.662%

From the Internal rate of return value obtained, we can conclude that, project B is more profitable as it has a higher IRR than project A.