41. Two mutually exclusive projects have the following cash flows ($) and internal rates of return

Project | IRR | Year 0 | Year 1 | Year 2 | Year 3 | Year 4 |

X | 26.36% | -2,340 | 240 | 729 | 505 | 3,680 |

Y | 26.68% | -2,340 | 240 | 729 | 990 | 3,115 |

- Option : B
- Explanation : Compute the NPV of both the projects at 10% discount rate. Using the
financial calculator,
enter CF for Years 0 – 4.

Project X: CF0 = -2340, CF1 = 240, CF2 = 729, CF3 = 505, CF4 = 3680,

I = 10, CPT NPV. NPV = $1,373.56.

Project Y: CF0 = -2340, CF1 = 240, CF2 = 729, CF3 = 990, CF4 = 3115, I = 10, CPT NPV. NPV = $1,352.05.

B is correct because Project X has a higher NPV and the projects are mutually exclusive, only Project X should be accepted.

Cash Flows | ||||||||

Year | 0 | 1 | 2 | 3 | 4 | NPV | IRR (%) | |

Project A | -100 | 0 | 0 | 0 | 200 | 24.20 | 18.92 | |

Project B | -100 | 40 | 40 | 40 | 40 | 19.19 | 21.86 |

- Option : B
- Explanation : When valuing mutually exclusive projects, the decision should be made with the NPV method because this method uses the most realistic discount rate, namely the opportunity cost of funds. In the example, the reinvestment rate for the NPV project (here 12 percent) is more realistic than the reinvestment rate for the IRR method (here 18.92 percent or 21.86 percent).

45. A project has the following cash flows (£):

Year 0 | Year 1 | Year 2 | Year 3 | Year 4 |

–3,250 | 1,505 | 550 | 955 | 1,820 |

*/?>

*/?>

*/?>

*/?>