Answer:
- Net present value of each project:
Project A:$37,193
Project B:$4,629
=> Project A should be chosen based on NPV approach as its NPV is higher.
- Internal rate of return of each project:
Project A: 20%
Project B: 12%
=>Project A should be chosen based on IRR approach as its IRR is higher
Explanation:
- Net present value calculation:
NPV for Project A: -111,000 + (37,116/0.08) x [1-1.08^(-5)] = $37,193
NPV for Project B: -43,000 + (11,929/0.08) x [1-1.08^(-5)] = $4,629.
- Internal rate of return approach;
IRR is the discount rate that bring NPV of project's cash flows to 0. Thus:
IRR for project A: -111,000 + (37,116/IRR) x [1-(1+IRR)^(-5)] = 0 <=> IRR = 20%
IRR for project B: -43,000 + (11,929/IRR) x [1-(1+IRR)^(-5)] = 0 <=> IRR = 12%
