Comparing IRR and the NPV of Different Projects
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Mr. CFO is evaluating 2 different projects. One requires an initial investment (cash outlay) of $200,000. Thereafter, it is expected to generate annual cash flows of $75,000/year for 6 years. The appropriate discount rate is 8%. Project B requires an initial investment of $1 million. Thereafter, it will produce annual cash flows of $500,000, for the next 4 years. The appropriate discount rate is 10%.
What is the NPV for each project? What is the IRR? What is the payback period? What is the discounted payback period?
Which project would you accept, if either? Why or why not?
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Solution Summary
In this solution, the net present value and the internal rate of return is calculated to determine which project a company should invest in.
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Project A
Year Cash Flows Disc. Factor Present Value Cumulative discounted NCF
0 ($200,000) 1.000 ($200,000) ($200,000)
1 $75,000 0.926 $69,444 ($130,556)
2 $75,000 0.857 $64,300 ($66,255)
3 $75,000 0.794 $59,537 ($6,718)
4 $75,000 0.735 $55,127 $48,410
5 $75,000 ...
Education
- Chartered Accountant (Equivalent to CPA in US), Institute of Charted Accountants of India
- Bachelor of Commerce, West Bengal University
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