Mish Mash Pty. Ltd. wishes to choose between two mutually exclusive projects, A and B, each
giving only one positive net cash flow at the end of one year, as per the following table.
Net Cash Flows
Year 0 Year 1
Project A -400 500
Project B -200 280
Determine the IRR for each project manually by equating the NPV to zero and solving for the
discount rate. Determine the cost of capital at which the firm should be indifferent between the
two projects and give a rough sketch of the NPV profiles of the projects. Under what
circumstances will choosing the project with the higher IRR give the best outcome for the firm’s
shareholders?
Any help will be much appreciated.
+118651 I really do not know but I suppose I can discuss it a little.
NPV to zero?? Net present value. There is no inflation rate given so maybe i assume it is 0 ?
Maybe
NPV of Project A: -400+500=100
What discount rate??
IRR Internal rate of return:
Project A: 100/400 *100% = 24% (A $100 profit for an initial capital outlay of $400)
I'd go for the one with the best rate of return but you do need to look at other factors.
Like is that rate of return likely to continue into the furture.
The is a very cursory look at this problems. I really don't know what I am talking about. 
+118651 I really do not know but I suppose I can discuss it a little.
NPV to zero?? Net present value. There is no inflation rate given so maybe i assume it is 0 ?
Maybe
NPV of Project A: -400+500=100
What discount rate??
IRR Internal rate of return:
Project A: 100/400 *100% = 24% (A $100 profit for an initial capital outlay of $400)
I'd go for the one with the best rate of return but you do need to look at other factors.
Like is that rate of return likely to continue into the furture.
The is a very cursory look at this problems. I really don't know what I am talking about.
