Question

You are considering two independent projects. Project A has an initial cost of $125,000 and cash inflows of $46,000, $79,000, and $51,000 for Years 1 to 3, respectively. Project B costs $135,000 with expected cash inflows for Years 1 to 3 of $50,000, $30,000, and $100,000, respectively. The required return for both projects is 16 percent. Based on IRR, you should:

Answer 1

Choose Project A. Because it has a positive Net Present Value.

Explanation :

Find the Net Present of the two project. Then choose the Project with the highest or positive Net Present Value.

Calculation of NPV of Project A using a Financial Calculator :

Project A:

($125,000) CFj

$46,000 Cfj

$79,000 Cfj

$51,000 Cfj

i/yr 16.00 %

Shift NPV $6,038.58

Calculation of NPV of Project B using a Financial Calculator :

Project A:

($135,000) CFj

$50,000 Cfj

$30,000 Cfj

$100,000 Cfj

i/yr 16.00 %

Shift NPV -$5,535.90

Conclusion :

Choose Project A. Because it has a positive Net Present Value.