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NPV versus IRR: At what interest rate would you prefer Project A to B; what is IRR?

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NPV versus IRR. Here are the cash flows for two mutually exclusive projects:

Project C0 C1 C2 C3
A
-$20,000 +$8,000 +$8,000 +$8,000

B
-$20,000 0 0 +$25,000

a. At what interest rates would you prefer project A to B? Hint: Try drawing the NPV profile of each project.

b. What is the IRR of each project?

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Solution Summary

The solution shows all the calculations to arrive at the correct responses to the questions.

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a. At what interest rates would you prefer poject A to B?
Let Payment = 8000
FV = -25000
PV = 0
Number of periods = 3
compute Rate = 4.11%
Then if Rate < 4.11%, the PV of ...

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