A firm has a capital budget of $100 which must be spent on 1 pf 2 projects, each requiring a present outlay

A firm has a capital budget of $100 which must be spent on 1 pf 2 projects, each requiring a present outlay of $100. Project A yields a return of $120 after 1 year, whereas Project B yields $201.14 after 5 years.

Calculate

  1. The NPV of each project using 10% discount rate
  2. The IRR of each project

What are the project rankings on the basis of these two investment decision rules? Supposed that you are told that the firms reinvestment rate 12% which project should the firms choose?


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