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The Box Company was confronted with the two mutually exclusive investment projects, A and B, which have the following after-tax cash flows: Cash Flows, per Year ($) Project 0 1 2 3 4 A (12,000) 5,000 5,000 5,000 5,000 B (12,000) Nil Nil Nil 25,000 Based on these cash flows: (a) Calculate each project’s NPV and IRR
The Box Company was confronted with the two mutually exclusive investment projects, A and B, which have the following after-tax cash flows:
Cash Flows, per Year ($)
Project 0 1 2 3 4
A (12,000) 5,000 5,000 5,000 5,000
B (12,000) Nil Nil Nil 25,000
Based on these cash flows:
(a) Calculate each project’s NPV and IRR. (Assume that the firm’s cost of capital after taxes is 10 percent.)
(b) Suggest to the management as to which project to be chosen based on the IRR criterion.
(c) Evaluate the rankings given by the NPV and IRR methods
Expert Solution
Answer : Below is the Table showing Net Present value of Project A and B
Project A :
| Year | Cash Inflow | Present Value Factor @10% | Present value of cash inflow |
| 1 | 5000 | 0.909090909 | 4545.454545 |
| 2 | 5000 | 0.826446281 | 4132.231405 |
| 3 | 5000 | 0.751314801 | 3756.574005 |
| 4 | 5000 | 0.683013455 | 3415.067277 |
| Total Present value of cash inflow | 15849.32723 | ||
| Less : Cash outflow | 12000 | ||
| Net Present Value | 3849.33 |
Project B
| Year | Cash Inflow | Present Value Factor @10% | Present value of cash inflow |
| 1 | 0 | 0.909090909 | 0 |
| 2 | 0 | 0.826446281 | 0 |
| 3 | 0 | 0.751314801 | 0 |
| 4 | 25000 | 0.683013455 | 17075.33638 |
| Total Present value of cash inflow | 17075.33638 | ||
| Less : Cash outflow | 12000 | ||
| Net Present Value | 5075.34 |
Calculation of IRR of Project A and B :
Below is the image showing calculation of IRR
(b.) Based on IRR critrion Management should choose Project A as it has higher IRR.
(c.) Ranking
| Project | NPV | IRR |
| A | 2 | 1 |
| B | 1 | 2 |
As per NPV Project B will be choosen as it has higher Net Present Value but as per IRR project A will be choosen as it has higher IRR. But in Case of Conflict generally we used to select the project with the higher Net Present value.
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