Computing NPV, IRR and MIRR
Project S has a cost of $10,000 and is expected to produce benefits (cash flow) of $3,000 per year for 5 years.
Project L costs $25,000 and is expected to produce cash flows of $7,400 per year for 5 years.
Calculate the two projects' NPVs, IRRs, MIRRs, and PIs assuming a cost of capital of 12%. Which project would be selected, assuming they are mutually exclusive using each ranking method? Which should actually be selected?
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Solution Preview
Please see the attached Excel 97-2003 worksheet.
The Net Present Value discounts the cash flows and deducts the initial investment to determine whether, at the discount rate, the project adds to the investor's wealth and by how much. Project L adds $1,675.34 and Project S adds $814.33. Based upon NPV, I would choose Project L.
The Internal Rate of Return computes the rate of return at which the project's net present value is $0. Project L's IRR is 14.67 percent and Project S's is ...
Solution Summary
For two projects, this solution illustrates how to compute the Net Present Value, Internal Rate of Return, and Modifed Internal Rate of Return. It then discusses which project should be selected.