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PDtax, CPA firm owner, business consultant, author

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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

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.

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