You are presented with the following projects and their cash flows:
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Project A
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Project B
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Project C
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Initial Investment
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$ (50,000)
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$ (50,000)
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$(250,000)
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Projected Cash Flow
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Year 1
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$ 10,000
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$ 25,000
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$ 60,000
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Year 2
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$ 15,000
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$ 30,000
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$ 60,000
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Year 3
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$ 20,000
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$ 20,000
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$ 60,000
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Year 4
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$ 30,000
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$ 15,000
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$ 60,000
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Year 5
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$ 25,000
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$ 10,000
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$ 60,000
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Total Projected Cash Flow
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$100,000
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$100,000
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$ 300,000
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From the above data, calculate the following:
a) The NPV for each project and state which project should be chosen and why.
b) The Payback period for each project and state which project should be chosen and why.
1. According to Investopedia.com: IRR is the interest rate, also called the discount rate that is required to bring the net present value (NPV) to zero. That is, the interest rate that would result in the present value of the capital investment, or cash outflow, being equal to the value of the total returns over time, or cash inflow.
Assume a one-year project with an initial investment of $10,000 that yields a return of $15,000. What would be the IRR?