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PRACTICE PROBLEM ON CAPITAL BUDGETING TECHNIQUES: NPV AND IRR Suppose you have to choose between two mutually...

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Finance

PRACTICE PROBLEM ON CAPITAL BUDGETINGTECHNIQUES: NPV AND IRR

Suppose you have to choose between two mutually exclusiveinvestment projects with the following cash flows (all numbers arein $1,000s):

t=0t=1t=2
Project A-$400$250$300
Project B-$200$140$179

Both projects have adiscount rate of 9%. Determine the Payback Period, Net PresentValue (NPV) and the IRR for each project. Whichis the better project based on NPV? And how can you usethe IRR criterion to obtain the correct(i.e., value maximizing) project choice?

Answer & Explanation Solved by verified expert
4.3 Ratings (614 Votes)
Project A Payback period Cumulative cash flow for year 0 400 Cumulative cash flow for year 1 400 250 150 Cumulative cash flow for year 2 150 300 150 150 300 05 Payback period 1 05 15 years Net present value Net present value Present value of cash inflows present    See Answer
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PRACTICE PROBLEM ON CAPITAL BUDGETINGTECHNIQUES: NPV AND IRRSuppose you have to choose between two mutually exclusiveinvestment projects with the following cash flows (all numbers arein $1,000s):t=0t=1t=2Project A-$400$250$300Project B-$200$140$179Both projects have adiscount rate of 9%. Determine the Payback Period, Net PresentValue (NPV) and the IRR for each project. Whichis the better project based on NPV? And how can you usethe IRR criterion to obtain the correct(i.e., value maximizing) project choice?

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