Assignment ACC501

Period Project A Project B

(Rs.) (Rs.)
0 -42,000 -42,000
1 25,000 15,000
2 21,000 17,000
3 15,000 23,000
4 11,000 27,000

1. What is the IRR for each of these projects? Which project company should
accept according to IRR rule?

Project A:
C0 = -42,000, C1 = 25,000, C2 = 21,000, C3 = 15,000, C4 = 11,000
NPV=0=C1 / (1+IRR) + C2 / (1+IRR) 2 + C3 / (1+IRR) 3 + C4 / (1+IRR) 4 + C0
At 20% discount rate:
NPV=C1 / (1+R) + C2 / (1+R) 2 + C3 / (1+R) 3 + C4 / (1+R) 4 + C0
= 25,000/ (1+0.2) + 21,000/ (1+0.2) 2+ 15,000/ (1+0.2) 3+ 11,000/ (1+0.2) 4- 42,000 =
7,402.0062
At 30% discount rate:
NPV=C1 / (1+R) + C2 / (1+R) 2 + C3 / (1+R) 3 + C4 / (1+R) 4 + C0
= 25,000/ (1+0.3) + 21,000/ (1+0.3) 2+ 15,000/ (1+0.3) 3+ 11,000/ (1+0.3) 4- 42,000 =
335.7025
At 30.54964 % discount rate:
NPV=0=C1 / (1+IRR) + C2 / (1+IRR) 2 + C3 / (1+IRR) 3 + C4 / (1+IRR) 4 + C0
= 25,000/ (1+0.354964) + 21,000/ (1+0.354964) 2+ 15,000/ (1+0.354964) 3+ 11,000/
(1+0.354964) 4- 42,000 = 0.000000
Project B:
C0 = -42,000, C1 = 15,000, C2 = 17,000, C3 = 23,000, C4 = 27,000
NPV=0=C1 / (1+IRR) + C2 / (1+IRR) 2 + C3 / (1+IRR) 3 + C4 / (1+IRR) 4 + C0
At 20% discount rate:
NPV=C1 / (1+R) + C2 / (1+R) 2 + C3 / (1+R) 3 + C4 / (1+R) 4 + C0
= 15,000/ (1+0.2) + 17,000/ (1+0.2) 2+ 23,000/ (1+0.2) 3+ 27,000/ (1+0.2) 4- 42,000 =
8,636.5741
At 30% discount rate:
NPV=C1 / (1+R) + C2 / (1+R) 2 + C3 / (1+R) 3 + C4 / (1+R) 4 + C0
= 15,000/ (1+0.3) + 17,000/ (1+0.3) 2+ 23,000/ (1+0.3) 3+ 27,000/ (1+0.3) 4- 42,000 =
(480.0952)
At 29.38705% discount rate:
NPV=0=C1 / (1+IRR) + C2 / (1+IRR) 2 + C3 / (1+IRR) 3 + C4 / (1+IRR) 4 + C0
= 15,000/ (1+0.2938705) + 17,000/ (1+0.2938705) 2+ 23,000/ (1+0.2938705) 3+ 27,000/
(1+0.2938705) 4- 42,000 = 0.000000
Summary of Question-1:
IRR for Project A: 30.54964%
IRR for Project B: 29.38705%
As per IRR rule, both projects are acceptable since IRR is high. Project A has slightly
more IRR so it is more favorable in terms of IRR.

2. What is the NPV for each of these projects? If the required rate of return is
12 percent. Which project company should accept according to NPV rule?

Project A:
C0 = -42,000, C1 = 25,000, C2 = 21,000, C3 = 15,000, C4 = 11,000
At 12% discount rate:
NPV=C1 / (1+R) + C2 / (1+R) 2 + C3 / (1+R) 3 + C4 / (1+R) 4 + C0
= 25,000/ (1+0.12) + 21,000/ (1+0.12) 2+ 15,000/ (1+0.12) 3+ 11,000/ (1+0.12) 4- 42,000
= 14,729.9026

Project B:
At 12% discount rate:
NPV=C1 / (1+R) + C2 / (1+R) 2 + C3 / (1+R) 3 + C4 / (1+R) 4 + C0
= 15,000/ (1+0.12) + 17,000/ (1+0.12) 2+ 23,000/ (1+0.12) 3+ 27,000/ (1+0.12) 4- 42,000
= 18,475.0869
NPV rule dictates that company can take projects which have positive NPV. Both
projects can be accepted as NPV is positive, however Project B has more NPV, hence it
will be preferred over project A if one project is to be selected amongst the two.

3. If the decision on the basis of NPV is different than that of IRR, which
particular criteria company should prefer and why?

Net Present value should be preferred over IRR because it reflects more realistic
reinvestment rate assumptions and is also a better indicator of profitability. It is actually
the difference of discounted cash flows and initial cost which gives a much better
picture.