Question 1 Consider the following mutually exclusive investments T=0 1 2 Investm

Question

Question 1

Consider the following mutually exclusive investments

T=0

1

2

Investment A:

-100

20

120

Investment B:

-100

100

31.25

Find IRRs for both projects

Draw a graph, where you will show the NPV of each project as a function of its discount rate (i.e NPV on the vertical axis and r on the horizontal axis). Both NPVs should be on the same graph.

Find the cross over rate

Please describe as fully as possible which project is the best.

T=0

1

2

Investment A:

-100

20

120

Investment B:

-100

100

31.25

Explanation / Answer

Answer:IRR:

Investment A: 140/100=1.4

IRR = 26.6%

Investment B: 131.25/100=1.3125

IRR =33.5%

Investment A is the best because it has higher cash inflow and outflow for the both the investment is the same.

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