You are considering two independent projects. Project A has an initial cost of $125,000 and cash inflows of $46,000, $79,000, and $51,000 for Years 1 to 3, respectively. Project B costs $135,000 with expected cash inflows for Years 1 to 3 of $50,000, $30,000, and $100,000, respectively. The required return for both projects is 16 percent. Based on IRR, you should:

Answer :

Choose Project A. Because it has a positive Net Present Value.

Explanation :

Find the Net Present of the two project. Then choose the Project with the highest or positive Net Present Value.

Calculation of NPV of Project A using a Financial Calculator :

Project A:  

($125,000)CFj

$46,000         Cfj

$79,000         Cfj

$51,000         Cfj

i/yr             16.00 %

Shift NPV  $6,038.58

Calculation of NPV of Project B using a Financial Calculator :

Project A:  

($135,000)CFj

$50,000         Cfj

$30,000         Cfj

$100,000       Cfj

i/yr             16.00 %

Shift NPV  -$5,535.90

Conclusion :

Choose Project A. Because it has a positive Net Present Value.

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