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Calculating NPV and IRR for the given projects

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XYZ is evaluating two mutually exclusive projects with the following net cash flows:

Project A

0 years=-$2000
1 year =$300
2 year=$500
3 year=$800
4 year=$1200

Project B
0 years=-$2000
1 year =$1000
2 year=$800
3 year=$500
4 year=$200

1) XYZ's WACC is 10.3% and both projects have the same risk as the firms average project. calculate each projects NPV

2) XYZ's CFO has instructed managers to use the IRR method when choosing between mutually exclusive projects. if managers choose the project with the highest IRR, how much value will be lost?

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Solution Summary

Solution describes the steps to calculate NPV and IRR for the given projects.

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Please refer attached file for better clarity of tables.

1) XYZ WACC is 10.3% and both projects have the same risk as the firms average project. calculate each projects NPV

Project A
Year End Cash Flow PV
n Cn Cn/(1+10.3%)^n
0 -2000 -2000.00
1 300 271.99
2 500 410.98
3 800 ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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