Project Alpha requires an outlay of $10,000 immediately. Project Alpha has a 1-y

Question

Project Alpha requires an outlay of $10,000 immediately. Project Alpha has a 1-year life and is
expected to produce a net cash flow at the end of one year of $20,000. Project Beta, a mutually
exclusive alternative to Alpha, requires an outlay of $20,000 immediately. It, too, is expected to
have a 1-year life and to produce a net cash flow at the end of one year of $35,000.

Compare the internal rate of return for both projects. Compute the NPV for both projects, using a
cost of capital of 10 percent.

Which projects should be undertaken?

Explanation / Answer

Comparing IRR, A is 100% while B is 75%

However, B has a higher NPV than A.

Not only that, the opportunity cost for choosing B over A (B-A) has a positive IRR and a positive NPV. Therefore, I will clearly choose B.

Year Project A Project B Proj B - A 0 -10000 -20000 -10000 1 20000 35000 15000 IRR 100% 75% 50% NPV $8,181.82 $11,818.18 $3,636.36

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