A company is considering two mutually exclusive investment projects. The firm's cost of capital is 12%. Each project costs $7 million and the after-tax cash flows for each are as follows:
Project OneProject TwoYear 1$6.6 million$3.0 millionYear 2$1.5 million$3.0 millionYear 3$0.1 million$3.0 millionIndicate which project should be accepted and whether the IRR and NPV methods would lead to the same decision.
Project accepted?Same decision?
The NPVs for Project One and Project Two are $0.160 million and $0.206 million, respectively, thus, Project Two should be selected. The IRRs for Projects One and Project Two are 14.2% and 13.7%, respectively. NPV is considered a superior method for ranking mutually exclusive projects.
How do you calculate in your calculators? Also, I got an error when attempting to calc IRR. Please help!