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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 Preview

    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 ...

    Solution Summary

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

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