You have two projects with the following cash flows. You can choose only one of the projects. Your financial software gives you the following information. You are very tempted to select projects based on IRR which you recall to be a return. Obviously, you would think of choosing project B.

Year, t	A, $m	B, $m
0	-1,000	-500
1	100	400
2	200	350
3	500	250
4	700	100
5	800	50
IRR, %	25.46	53.88
NPV (8%)
NPV (20%)

Yet, you remember from your MBA classes that NPV is important and sometimes there could be conflicts in selection between this measure and the others.

You also remember that you could determine that with the help of a graph. Your task then is:

1. Draw the graph in question (as an approximation) and decide which project to take if your cost of capital is 8%. How about if your firm’s cost of capital is 20%?

2. Explain why IRR and NPV could give you conflicting information—focus on the size and timing of cash flows.

Answer rating: 100% (QA)

Since the cash flows of project A is on higher side at a lower rate we will choose project A Therefo... View the full answer