Cash flows beginning at time zero with negative cash flow

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Reference no: EM131444425

Assume the opportunity cost of capital is 10%.

a. Create two normal projects (i.e., sets of cash flows beginning at time zero with a negative cash flow and continuing with subsequent positive cash flows) that are both positive NPV. Create the projects such that one of the two has a higher NPV and the other has a higher IRR (you may want to use the excel IRR function to compute the IRR of your project).

b. Explain intuitively why it is possible for NPV to favor one project, but IRR favor the other.

c. Briefly describe the types of firms that may prefer IRR over NPV.

d. Connect your answers to parts b and c. Why does it make sense for the type of firms you discuss in part c to prefer IRR given your answer in B, regarding how the two rules can sometimes send opposite messages?

Reference no: EM131444425

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