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PDtax
PDtax, CPA firm owner, business consultant, author
Category: Single Problem
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Experience:  I have been a business consultant and college instructor for years.
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Your firm is considering two projects with the following

Customer Question

Your firm is considering two projects with the following cash flows:
Discount rate: 12%
Project A: -$500 , $167, $180, $160, $ 100, $100
Project B: -500 , $200, $250, $170, $25, $ 30
A) If the appropriate discount rate is 12%, rank the two projects.
B) Which project is preferred if you rank by IRR?
D) Should you use NPV or IRR to choose between the two projects? Give a brief discussion
Thank You
Submitted: 11 months ago.
Category: Single Problem
Expert:  PDtax replied 11 months ago.

Hi from just answer. I'm PDtax. I'll assist.

Expert:  PDtax replied 11 months ago.

The Excel spreadsheet supporting the choice of B in both cases is attached.

D) Should you use NPV or IRR to choose between the two projects? Give a brief discussion

While they provide similar results, since there is only one negative cash flow, the discount rate is constant through the project and the cash flows appear certain (no risk factor), IRR presents readily to a wider audience. Presenting the small positive NPV for both projects might misdirect an audience, who might misread the net present value as a small return, reducing the value of both projects. Using a rate of return likely makes presenting easier to present.

Thanks for asking at Just Answer. Positive feedback is appreciated. I'm PDtax.

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