Consider the following two projects:

Net Cash Flow Each Period
Initial Outlay 1 2 3 4
Project A $4,000,000 $2,003,000 $2,003,000 $2,003,000 $2,003,000
Project B $4,000,000 0 0 0 $11,000,000
a. Calculate the net present value of each of the above projects, assuming a 14 percent discount rate.
b. What is the internal rate of return for each of the above projects?
c. Compare and explain the conflicting rankings of the NPVs and IRRs obtained in parts a and b above.
d. If 14 percent is the required rate of return, and these projects are independent, what decision should be
made?
e. If 14 percent is the required rate of return, and the projects are mutually exclusive, what decision should be
made?

a. NPV of A = $1,836,166 NPV of B = $2,512,883
b. IRR of A = 35.0% IRR of B = 28.78%
c. B has more distant cash flows, thus its IRR is less while its NPV is greater. This time disparity is one of IRR's
ranking problems.
d. If these projects are independent, we would accept them both because they each have a positive NPV.
e. If these projects are mutually exclusive, we would select B because it has the highest positive NPV.