# Excel: Relationship Between NPV and IRR

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1. Do calculation in EXCEL and MICROSOFT WORD - make sure able to see calculation in background of cell

2. Describe relationship between NPV and IRR

3. Give explanation for why A or B Corporation is picked

(See attached file for full problem description).

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#### Solution Preview

Please see the attached files.

In a 1,050-1,500-word memo, define, analyze, and interpret the answers to items (c) through (h). .

Present the rationale behind each item and why it supports your decision stated in item (i). Also, attempt to describe the relationship between NPV and IRR.

Several different procedures are available to analyze potential business investments. Some concepts are better than others when it comes to reliability but all provide enough information to get the general scope of the investment. The five procedures that provide useful information are the Net present Value (NPV), the Payback Rule, the Average Accounting Return (AAR), the Internal Rate of Return (IRR), and the Profitability Index (PI). These procedures will help rank the projects from the greatest investment to the worst.

First, the most important concept of evaluating these investments is the NPV. NPV is defined as the difference between an investment's market value and its cost. It is only a good investment if it makes money for the company so a positive NPV will be needed. The projects can be ranked from the most positive NPV to the lowest to determine profitability. This quantitative ranking method is the best to use due to its consideration of the time value of money and its more accurate breakdown of value.

COMMENTS: NPV is a discounted cash flow technique, which explicitly recognize the time value of money. It is defined as the difference between the present value of cash inflow and cash outflows.

In our case we will choose Corporation B as it has higher NPV of $40251 as compared to the Corporation A's NPV of $20979.

Second, the IRR is the next closest alternative to the NPV calculations; therefore it is next in line as far as a method to calculate for investments. The IRR is the discount rate that makes the NPV of an investment zero. An investment should be accepted if it is higher than the required return; if it is lower, the project is not acceptable. The IRR can be a problem if cash flows are not conventional or when in this case with multiple projects to compare, the IRR can be misleading and not provide the actual best investment. With ...

#### Solution Summary

The solution explains the relationship between NPV and IRR.