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Lev, Tax Preparer
Category: Finance
Satisfied Customers: 29558
Experience:  Personal Investment, Tax Preparation
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Your company is considering two mutually exclusive projects

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Your company is considering two mutually exclusive projects Projects S and W whose costs and cash flows are below: Year 0: Project S- (14,000) ; Project W-(22,840)    Year 1: Project S- 8,000;       Project W- 8,000                  Year 2: Project S- 6,000;       Project W- 8,000                  Year 3: Project S- 2,000;       Project W- 8,000        Year 4: Project S- 3,000;               Project W- 8,000   The projects are equally risky and their required return is 12 %. Compute the NPV and IRR of each project. Recommend which project should be accepted.
Submitted: 8 years ago.
Category: Finance
Expert:  Lev replied 8 years ago.

Net Present Value (NPV) is the PV of the stream of future Cash Flow (CF) from a project minus the project’s net investment.


NPV = CF0 + CF1*(1+k)^1 + CF2*(1+k)^2 + CF3*(1+k)^3 + CF4*(1+k)^4


Internal Rate of Return (IRR) is the discount rate at which NPV is zero.


CF0 + CF1*(1+IRR)^1 + CF2*(1+IRR)^2 + CF3*(1+IRR)^3 + CF4*(1+IRR)^4 = 0


Please find calculations HERE


NPV_S = $10016.81

NPV_W = $19982.78


IRR_S = -15%

IRR_W = -13%


For Mutually exclusive investments - the project with the largest NPV should be recommended.


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