Question: Question about NPV & IRR 1) Consider the following two sets of project cash flows: Discount Project Year 0 Year 1 Year 2 Year 3

Question about NPV & IRR 1) Consider the following two sets

Question about NPV & IRR

1) Consider the following two sets of project cash flows: Discount Project Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Rate X -903 175.6 169.8 201.4 251.5 299.2 305.2 0.1037 -513 190.5 195.5 90.5 80.5 85.5 110.5 0.1037 A) Assume that projects X and Y are mutually exclusive. The correct investment decision and the best rational for that decision is to: i) invest in Project Y since IRRy > IRRx. ii) invest in Project Y since NPVy > NPVx. iii) neither of the above. B) What are the incremental IRR and NPV of Project X? C) Is the use of the incremental measures in B) appropriate to your evaluation of the preferred project? Explain. D) Which is the preferred project? Explain and justify the basis for your choice. (6 marks)

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