Cash Flows

Year Project A Project B

$0$ $$(15,000)$ $$(15,000)$

$1$ $$4,600$ $$10,000$

$2$ $$4,600$ $$15,000$

$3$ $$4,600$ $$20,000$

$4$ $$4,600$ $$10,000$

$5$ $$4,600$ $$(50,000)$

Internal Rate of Return

IRR Guess $0$

IRR Guess $1$

Net Present Value at Rate of$...$

$5\%$

$10\%$

$15\%$

Comparing Net Present Value with

Internal Rate of Return:

$1.$ Starting from the Excel spreadsheet and using the $=$IRR$($values$,[$guess$])$ Excel function, calculate the Internal Rate of Return $($IRR$)$ for Project A and for Project B$.$

Leave the guess field empty. Round your answer to $0$ decimal places.

Based on the IRR alone, which do you conclude is the better project to invest in$?$

$2.$ Recalculate the IRR for Project A and for Project B $-$ again, to $0$ decimal places $-$

but this time, add a guess to the $=$IRR$($values$,[$guess$])$ function:

$($a$)$ If your guess in $=$IRR$($values$,[$guess$])$ is $0,$ what is the IRR for each project?

$($b$)$ If your guess in $=$IRR$($values$,[$guess$])$ is $1,$ what is the IRR for each project?

Based on your recalculated IRR alone, which do you conclude is the better project to

invest in$?$

$3.$ The IRR decision rule compares the IRR to the required rate of return $($also known

as the discount or hurdle rate$).$ Suppose we are analyzing $3$ possible required rates of

return:

$5\%$

$10\%$

$15\%$

$1$

Based on the IRR decision rule, for each of the above $3$ required rates of return, which

do you conclude is the better project to invest in$?$

$4.$ Now use the $=$NPV$($rate$,$ value$1,[$value$2],...)$ Excel function to calculate the

Net Present Value $($NPV$)$ for Project A and Project B at the $3$ possible required rates

of return:

$5\%$

$10\%$

$15\%$

Based on the NPV decision rule, which do you conclude is the better project to invest

in$?$

$5.$ Based on your preceding answers,

$($a$)$ Which decision rule $-$ IRR or NPV $-$ would you use to make a capital budgeting

decision between Project A and Project B$?$

$($b$)$ What are your reasons for choosing that rule?