You needed to choose between two projects, which each required a $900,000 investment. You could only choose one, and your discount rate was 10%. Here's a reminder of the forecasted cash flows:

	Project A	Project B
Year 0	($900,000)	($900,000)
Year 1	$500,000	$0
Year 2	$500,000	$0
Year 3	$300,000	$1,670,000

The NPV of Project A was $193,160 and the NPV of Project B was $354,700. Finally, now that we understand IRR, you can calculate the two IRRs. The IRR of Project A is 22.9% and the IRR of Project B is 22.9%.

We know that Project B creates more value. What mistakes would you make if you relied on IRR instead of looking at the NPV of the projects?

Answer rating: 100% (QA)

The calculations for the NPV and IRR of the two projects For both projects the initial investment is 900000 and the discount rate is 10 For Project A Year 0 900000 Year 1 500000 1 0101 454545 Year 2 5... View the full answer