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    NPV and IRR : explained

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    NPV/IRR. Consider projects A and B.

    Cash Flows, Dollars
    Project C0 C1 C2 NPV at 10%
    A -30,000 21,000 21,000 +$6,446
    B -50,000 33,000 33,000 + 7,273

    Calculate IRRs for A and B. Which project does the IRR rule suggest is best? Which project is really best?

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    Solution Preview

    NPV/IRR. Consider projects A and B.

    Cash Flows, Dollars
    Project C0 C1 C2 NPV at 10%
    A -30,000 21,000 21,000 +$6,446
    B -50,000 33,000 33,000 + 7,273

    Calculate IRRs for A and B. Which project does the IRR rule suggest is best? Which project is really best?

    Since the cash flows are the same over the years (annuity) we can use PVIFA factor to calculate NPV
    PVIFA= Present Value Interest Factor for an Annuity
    It can be read from tables or calculated using the following equations
    PVIFA( n, r%)= =[1-1/(1+r%)^n]/r%

    Project A
    Initial investment= $30,000
    Annual cash flow= $21,000

    We first calculate ...

    Solution Summary

    Calculates NPV and IRR of two projects.

    $2.19

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