Question

You have two potential investment projects, Project A and Project B. You can take one, but not both. The annual

cash flows for the two projects are:

Year 0 1 2 3

Project A Cash Flow: -$50,000 $45,000 $5,000 $5,000

Project B Cash Flow: -$50,000 $5,000 $5,000 $50,000

(a) Compute the IRR for each project: (Show results to two digits.)

IRR of A _______ percent

IRR of B ________ percent

(b) Compute the NPV for each project if the appropriate discount rate is 5%.

NPV of A $ _______

NPV of B $_________

Which project would you take, and why?

(c) Compute the NPV for each project if the appropriate discount rate is 10%.

NPV of A $ _____

NPV of B $ ______

Which project would you take, and why?

(d) Summarize the principles demonstrated by this problem.