# NPV and IRR : explained

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.