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Capital Budgeting : NPV and IRR methods

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The projected cash flows for two mutually exclusive projects are as follows:
Year Project A Project B
0 ($150,000) ($150,000)
1 0 50,000
2 0 50,000
3 0 50,000
4 0 50,000
5 250,000 50,000

If the cost of capital is 10%, the decidedly more favorable project is:
a. project B with an NPV of $39,539 and an IRR of 19.9%.
b. project A with an NPV of $5,230 and an IRR of 10.8%.
c. project A with an NPV of $39,539 and an IRR of 10.8%.
d. project B with an NPV of $5,230 and an IRR of 19.9%.

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Solution Summary

Solution describes the steps to calculate NPV and IRR in the given cases.

Solution Preview

Please refer attached file for better clarity of tables.

Cash Flows
Year Project A Project B PV Factor, PVF PV - Project A PV - Project B
n Ca Cb 1/(1+10%)^n Ca*PVF Cb*PVF
0 -150000 ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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