For the following projects, compute NPV, IRR, MIRR, profitability index, and payback. If these projects are mutually exclusive, which one(s) should be done? If they are independent, which one(s) should be undertaken?
A B C D
Year0 -1,000 -1,500 -500 -2,000
Year1 400 500 100 600
Year2 400 500 300 800
Year3 400 700 250 200
Year4 400 200 200 300
Discount rate 10% 12% 15% 8%
For the following projects, compute NPV, IRR, MIRR, profitability index, and payback. If these projects are mutually exclusive, which one(s) should be done? If they are independent, which one(s) should be undertaken?
A B C D
Year0 -1,000 -1,500 -500 -2,000
Year1 400 500 100 600
Year2 400 500 300 800
Year3 400 700 250 200
Year4 400 200 200 300
Discount rate 10% 12% 15% 8%
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Related questions
If projects are mutually exclusive, only one project can be chosen. The internal rate of return (IRR) and the net present value (NPV) methods will not always choose the same project. If the crossover rate on the NPV profile is below the horizontal axis, the methods will _____________ agree.
Projects Y and Z are mutually exclusive projects. Their cash flows and NPV profiles are shown as follows
| Year | Project Y | Project Z |
| 0 | -1,500 | -1,500 |
| 1 | 200 | 900 |
| 2 | 400 | 600 |
| 3 | 600 | 300 |
| 4 | 1000 | 200 |
If the weighted average cost of capital (WACC) for each project is 10%, do the NPV and IRR methods agree or conflict?
a. The methods conflict.
b. The methods agree
A key to resolving this conflict is the assumed reinvestment rate. The NPV calculation implicitly assumes that intermediate cash flows are reinvested at the assumes that the rate at which cash flows can be reinvested is the, and the IRR calculation. As a result, when evaluating mutually exclusive projects, the________ is usually the better decision criterion.
Tesar Chemicals is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. The CEO believes the IRR is the best selection criterion, while the CFO advocates the NPV. If the decision is made by choosing the project with the higher IRR rather than the one with the higher NPV, how much, if any, value will be forgone, i.e., what's the chosen NPV versus the maximum possible NPV? Note that (1) "true value" is measured by NPV, and (2) under some conditions the choice of IRR vs. NPV will have no effect on the value gained or lost.
WACC: 8%
| Year | 0 | 1 | 2 | 3 | 4 |
| CFS | -$1,500 | $300 | $400 | $700 | $800 |
| CFL | -$2,200 | $400 | $700 | $900 | $1,100 |
| $33.32 | ||
| $29.07 | ||
| $26.95 | ||
| $23.51 | ||
| $21.19 |
Tesar Chemicals is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. The CEO believes the IRR is the best selection criterion, while the CFO advocates the NPV. If the decision is made by choosing the project with the higher IRR rather than the one with the higher NPV, how much, if any, value will be forgone, i.e., what's the chosen NPV versus the maximum possible NPV? Note that (1) "true value" is measured by NPV, and (2) under some conditions the choice of IRR vs. NPV will have no effect on the value gained or lost.
WACC: 8%
| Year | 0 | 1 | 2 | 3 | 4 |
| CFS | -$1,500 | $300 | $400 | $700 | $800 |
| CFL | -$2,200 | $400 | $700 | $900 | $1,100 |
| $33.32 | ||
| $29.07 | ||
| $26.95 | ||
| $23.51 | ||
| $21.19 |
