Company K is considering two mutually exclusive projects. The cash flows of the projects are as follows:

Year Project A Project B
0 -$2,000,000 -$2,000,000
1 500,000
2 500,000
3 500,000
4 500,000
5 500,000
6 500,000
7 500,000 5,650,000
a. Compute the NPV and IRR for the above two projects, assuming a 13% required rate of return.
b. Discuss the ranking conflict.
c. What decision should be made regarding these two projects?

a. NPV of A = $211,305 NPV of B = $401,592.64
IRR of A = 16.33% IRR of B = 15.99%
b. The later cash flow of B causes its lower IRR even though it has the higher NPV.
c. B should be accepted because it is the mutually exclusive project with the highest positive NPV.

Business

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