A firm has a capital budget of $100 which must be spent on one of two projects, each requiring a present outlay of $100. Project A yields a return of $120 after one year, whereas Project B yields $201.14 after 5 years. Calculate:
the NPV of each project using a discount rate of 10%;
the IRR of each project.
What are the project rankings on the basis of these two investment decision rules? Suppose that you are told that the firm’s reinvestment rate is 12%, which project should the firm choose?
the problem is pretty easy and straightforward, however I don’t understand the second part of this exercise, where is is mentioned the 12%.
The NPV is project A: 9,19; B 24,89. IRR 20% and 15%.
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