Better Health Inc. is evaluating two capital investments, each of which requires

Question

Better Health Inc. is evaluating two capital investments, each of which requires an up-front (Year 0) expenditure of $1.5 million. The projects are expected to produce the following net cash inflows:

Year Project A Project B

1 $ 500,000 $ 2,000,000

2 1,000,000 1,000,000

3 2,000,000 600,000

a.) What is each projects IRR?

b.) What is each project's NPV if the opportunity cost of capital is 10%?

Also, please calculate the payback period for both projects. Then, explain which project you would choose and why.

Explanation / Answer

Considering all the factors Project B seems the better option, as ;

It would give a higher returns in a shorter span of time.

Year Project A Project B DF (10%) Project A Project B Project A Project B 0 (1,500,000) (1,500,000)    1.0000 (1,500,000) (1,500,000) 0 0 1       500,000    2,000,000    0.9091       454,545    1,818,182 (1,000,000)      500,000 2    1,000,000    1,000,000    0.8264       826,446       826,446 3    2,000,000       600,000    0.7513    1,502,630       450,789 IRR 44% 82% NPV    1,283,621    1,595,417

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