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Computing Internal Rate of Return and Net Present Value

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Henn Corp, Ltd. is examining two investment projects as a part of its expansion plan for the coming year. These two projects are not mutually exclusive. The cost of Project A is $12,950 while the second project (B) is expected to cost $18,625. Henn's cost of capital (required rate of return) is 11.5 %. Expected annual cash flows are projected to be as follows:

Year Project A Project B
1 3,250.00 6,850.00
2 3,250.00 6,850.00
3 3,250.00 6,850.00
4 3,250.00 6,850.00
5 3,250.00 6,850.00

Each project will last an estimated 5 years with no remaining significant scrap value. Determine the IRR and the NPV for each of these two projects. What should Henn Corp decide about each proposed project.

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Solution Summary

This solution illustrates how to compute the internal rate of return and net present value of two non-mutually exclusive projects, and discusses which project should be chosen.

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