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Two mutually exclusive projects have projected cash flows as follows:

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a. Determine the internal rate of return for each project.

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b. Determine the net present value for each project at discount rates of 0, 5, 10, 20, 30, and 35 the app. Standard messaging rates may apply.
percent.

c. Plot a graph of the net present value of each project at the different discount rates. My Textbook Solutions

d. Which project would you select? Why? What assumptions are inherent in your decision?

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Step-by-step solution 12th Edition 1st Edition 6th Edition

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Step 1 of 18

Before doing large amount of investment and or capital expenditure, company evaluates all the
available alternatives. Process of such evaluation of potential alternatives is termed as Capital
Budgeting. Objective of such capital budgeting is to select the project proposal that increase the
value of the firm. That means proposals whose present value of future cash inflows is more than
the initial cash outlay is selected. Present value concept is based on time value of money which
recognizes that $1 received today has more worth than the $1 received in some future date.

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Step 2 of 18

a. Internal Rate of Return:

• Internal rate of return defines expected rate of return of the project.

• In the other terms we can say that IRR is the rate at which present value of project’s all the
cash flows is zero that means NPV of the project is zero.

• If IRR of the project is more than the cost of capital i.e. r; then project should be accepted.

• If IRR of the project is less than the cost of capital i.e. r; then project should be rejected.

Formula to Calculate IRR

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For Project A

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Step 3 of 18

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Step 4 of 18

Calculation of IRR

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Step 5 of 18

For Project B

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Step 6 of 18

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Step 7 of 18

Calculation of IRR

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Step 8 of 18

b. Net Present Value:

• Net present value means, present value of the benefits to be derived from the capital budget
proposal.

• If NPV of the project is positive, project is selected and if NPV of the project is negative, Project
is rejected.

• Net present value can be calculated as present value of the future cash inflows less present
value of the future cash outflows less initial cash investment.

Formula for Net Present Value:

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Step 9 of 18

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Step 10 of 18

Calculation of NPV

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Step 11 of 18

For Project A

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Step 12 of 18

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Step 13 of 18

For Project B

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Step 14 of 18
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Step 15 of 18

c.

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Step 16 of 18

Graph of Net Present Value

Note:

• Discount rate is mentioned on X axis. And Net present value is mentioned on Y axis.

• Red line shows NPV for Project A while green line shows NPV for Project B.

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Step 17 of 18

d. Comparison of Two Projects:

Based on the above comparison; assuming that cost of capital will be less than or equal to 20%;
Project B should be selected as Positive NPV is more in Project B than Project A and IRR of
Project B is also lower than the Project A.

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Step 18 of 18

Based on above analysis project B is more profitable for the company.

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