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!
For Situational Awarenes (SA) I am using the TI BA 2 Plus Professional
If you are getting an error message on calculation of IRR, sounds like you might be forgetting the initial cash outflow of 7 million or forgetting to use the negative sign in the initial outflow. Here are the steps that I take and results I am getting:
[2nd] and [CE/C] (to clear anything prior)Hit [CF] button and type -7,000,000 hit [Enter] then hit [down] twice, enter the rest of the cash flows same way.Hit [NPV] and enter 12 and then press [Enter]Press [down] to get to NPV, then press [CPT]. I get 159,825.98 (rounds to 0.160 million)Press [IRR] and hit [CPT], I get 14.1537 (rounds to 14.2)Repeating process for Project two I get NPV of 205,493.80 and IRR of 13.7009