Question: You must choose between the two projects whose cash flows are shown below. The projects have the same risk. a. Compute the internal rate of

You must choose between the two projects whose cash flows are shown below.

The projects have the same risk.

a. Compute the internal rate of return and the net present value for the two projects. Assume a 10 percent discount rate.
b. Which of the projects is better according to each of the two methods?
c. What is the explanation for the differences in rankings between the net present value and the internal rate of return?
d. Which method is correct? Why?
e. Compute the internal rate of return for the incremental cash flows (project A minus project B). For discount rates below this internal rate of return, which project is best? For discount rates above this IRR, which project is best? Is this consistent with your answer to question d?

Project A Project B Now End-of Year 1 End-of-Year 2 -$12,000 7,900 6,850 -$2,400 2,500 950

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