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.