Problem - NPV versus IRR
Garage, Inc., has identified the following two mutually exclusive projects:
|
Year
|
Cash Flow (A)
|
Cash Flow (B)
|
|
0
|
-$29,700
|
-$29,700
|
|
1
|
15,100
|
4,650
|
|
2
|
13,000
|
10,150
|
|
3
|
9,550
|
15,900
|
|
4
|
5,450
|
17,500
|
a-1. What is the IRR for each of these projects?
a-2. Using the IRR decision rule, which project should the company accept?
a-3. Is this decision necessarily correct?
b-1. If the required return is 12 percent, what is the NPV for each of these projects?
b-2. Which project will the company choose if it applies the NPV decision rule?
c. At what discount rate would the company be indifferent between these two projects?