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%

5%

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, value1, [value2], ...) 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?

	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%