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You have two potential investment projects, Project A and Project B. You can take one, but not both. The annual cash flows for the two projects are

You have two potential investment projects, Project A and Project B. You can take one, but not both. The annual cash flows for the two projects are: 

Year                   0        1        2        3   

Project A Cash Flow:   -$50,000  $45,000   $5,000   $5,000 

Project B Cash Flow:   -$50,000   $5,000   $5,000  $50,000 

(a) Compute the IRR for each project: (Show results to two digits.)

IRR of A _______   percent

IRR of B ________  percent

(b) Compute the NPV for each project if the appropriate discount rate is 5%.

NPV of A $ _______

NPV of B $_________

Which project would you take, and why?

(c) Compute the NPV for each project if the appropriate discount rate is 10%. 

NPV of A $ _____

NPV of B $ ______

Which project would you take, and why?

(d) Summarize the principles demonstrated by this problem.

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