Your company is choosing between following non-repeatable,equally risky,mutually exclusive projects with the cash flows shown below.Your required rate of return is 10 percent.How much value will your firm sacrifice if it selects the project with the higher IRR?

Question

Quizplus · Accepted Answer

To determine the value sacrificed by selecting the project with the higher internal rate of return (IRR), we need to calculate the net present value (NPV) of each project using the required rate of return of 10%.

Project A: 
NPV = -500 + (100/1.1) + (200/1.1^2) + (300/1.1^3) + (400/1.1^4) = $235.68

Project B: 
NPV = -700 + (500/1.1) = $236.38

The difference in NPV between the two projects is: 
$236.38 - $235.68 = $0.70

This means that if the firm selects project B with the higher IRR, it will sacrifice an NPV of $0.70 compared to selecting project A. Therefore, the best choice is to select project A.

Your Company Is Choosing Between Following Non-Repeatable,equally Risky,mutually Exclusive Projects