Problem:
John is considering two capital expenditure projects; however, he has only enough money to do one project. The cash flows follow and the discount rate is 12%.
Project A Project B
Initial cost $(50,000) $(100,000)
Year 1 30,000 55,000
Year 2 30,000 55,000
Year 3 30,000 55,000
Q1. What is the internal rate of return for each project?
Q2. What is the NPV for each project?
Q3. Which project should John choose?
Q4. What are the drawbacks to using internal rate of return?