If you at the same time receive the recommendation of another project (Project B) from your CFO, which has the following cash flows:

 

The IRR for project B is 34%. Because of capital budget restrictions, you can only select one project from the two. Let's take the Base Case of Project A for comparison.

 

Given the required rate of return is 20%, calculate the NPV for project B.

 

Based on the IRR criterion, which project will you undertake? Explain why

 

Based on the NPV criterion, which project will you undertake? Explain why.

 

In general, under what conditions the NPV and IRR may provide conflicting results?

 

Are the projects you undertake in (g) and (h) the same? Which project will you finally undertake? Why? 

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Table 2: Cash flow of Project B Year 0 1 CFFA (S) -300,000 160000 2 120,000 3 120,000 4 120,000 5 120,000 Table 2: Cash flow of Project B Year 0 1 CFFA (S) -300,000 160000 2 120,000 3 120,000 4 120,000 5 120,000

Answer rating: 100% (QA)

To calculate the NPV for Project B we use the formula NPV CF CF 1r CF 1r CF 1r where CF represents t... View the full answer