The appropriate discount rate for the projects is a required rate of return of capital of 10% (opportunity cost of capital). After obtaining the cash flow projections for each project (see Tables 1 & 2), and crunching out the numbers, Tim realizes that the hill is going to be steeper than he thought. The various capital budgeting techniques, when applied to the two series of cash flows, provide inconsistent results. The project with the higher NPV has a longer payback period as well as a lower Accounting Rate of Return (ARR) and Internal Rate of Return

(IRR). Tim scratches his head, wondering how he can convince the Board that the IRR, ARR and Payback Period can often lead to incorrect decisions.

Calculate the IRR and NPV for each project. Tim wants to convince the Board that the IRR measure can be misleading when choosing between mutually exclusive alternatives. Why is the IRR decision rule unreliable in making the correct choice between the two projects? Tims presentation should inform the board on the different reinvestment assumptions underlying IRR and NPV and how that relates to the reliability of the IRR decision rule. What is the correct reinvestment assumption and why?