The Hyatt Group Inc., has identified the following two mutually exclusive projec

Question

The Hyatt Group Inc., has identified the following two mutually exclusive projects:

                        Cash Flows                 Cash Flows

Year                Project A                     Project B

   0                   -$10,000                      _$10,000

   1                           200                            5,000

   2                           500                            6,000

   3                        8,200                               500

   4                        4,800                               500

What is the IRR of each of these projects? If you apply the IRR decision rule, which project should the company accept? Is this decision necessarily correct?

If the required rate of return is 9 percent, what is the NPV of each of the projects? Which project will you choose if you apply the NPV decision rule?

Over what range of discount rates would you choose project A? Project B? At what discount rate would you be indifferent between these two projects? Explain.

Explanation / Answer

IRR:

NPV @ 10%

NPV @15%

IRR = Lower rate + [Lower rate NPV / (Lower rate NPV - Higher rate NPV)] x Diff in rates

Project A = 10 + [31.40/ (31.40+1306.80)] x 5

= 10.12%

Project B = 10 + [218/(218+499)] x 5

= 11.52%

NPV@9%

Project B should be chosen.

Year PVF@10% Project A Project B Cash flows PV Cash flows PV 0 1 -10000 -10000 -10000 -10000 1 0.909 200 181.80 5000 4545 2 0.826 500 413 6000 4956 3 0.751 8200 6158.20 500 375.50 4 0.683 4800 3278.40 500 341.50 31.40 218

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