Project 1 CF: -100, 36, 36, 36, 36 NPV = 14.12, IRR = 16.37 Project 2 CF: -100, 0, 0, 0, 175 NPV - 19.53, IRR= 15.02 What discount would result in the same NPV for both projects? a. A rate between 0.00 and 10 b. A rate between 10 and 15.02 c. A rate between 15.02 and 16.37 d. A rate above 16.37
B?
Sum over i=1 to 4 36/(1+r)^i = 175 / (1+r)^4 or sum over i = 1 to 4 36/(1+r)^i = 139/(1+r)^4 using 10% --> lhs = 89.53 rhs = 94.93 so between 10 and 15 percent should give you the right answer… answer b
cpk the way i did it is: create a new project with CF3=CF1-CF2 the cash flows would be 0,36,36,36,-139 if the two have same NPV then Cf3 npv=0 the irr is 13.15
B. C and D are incorrect right off the bat in this case. A rate below 10 wont work because then the unidscounted value of project 1 will be less then discounted value of project 2. so that leaves B.
florinpop… That is a very interesting approach… Good to keep in mind
B is the correct answer, although my first reaction was to assume C because the IRR for both projects is given, and the IRR always equals 0 NPV, therefore both their IRRs equal the same NPV (0).