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    Internal Rate of Return versus NPV (net present value)

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    John is considering two capital expenditure projects; however, he has only enough money to do one project. The cash flows follow and the discount rate is 12%.

    Project A Project B
    Initial cost $(50,000) $(100,000)
    Year 1 30,000 55,000
    Year 2 30,000 55,000
    Year 3 30,000 55,000

    A. What is the internal rate of return for each project?
    B. What is the NPV for each project?
    C. Which project should John choose?
    D. What are the drawbacks to using internal rate of return?

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    Solution Summary

    The solution examines the internal rate of return versus the net present value.