You are considering two independent projects with the follow

You are considering two independent projects with the following cash flows. The required return for both projects is 10%. Given this information, which one of the following statements is correct?
  

  

Froject A Project B -$950,000 $125,000 330,000 $ 55,000 50,000 $ 50,000 Year $400,000 450,000

Solution

Both the projects should be accepted because NPV is positive.

Internal rate of return is the rate at which NPV is zero. The IRR will be greater than 10% as NPV is positive. Hence, both the projects should be accepted on the basis of IRR rule also.

Year	Project A cash flows	Project B cash flows	PV factor 10%	PV of project A	PV of Project B
0	-$950000	-$125000	1	-$950000	-$125000
1	$330000	$55000	0.909	$299970	$49995
2	$400000	$50000	0.826	$330400	$41300
3	$450000	$50000	0.751	$337950	$37550
			NPV	$18320	$3845