Question

ABC's WACC is 10% and there are 2 projects available. Project Large has the following expected cashflows at time 0, 1, 2, 3 and 4 respectively: $-1000, $500, $400, $300 and $75. Project Small has the following expected cashflows at time 0, 1, and 2 respectively: $-80, $500, $-495. Assume the projects are mutually exclusive and your criteria to choose a project is based on IRR. Based on your decision, what is the profitable NPV, to the nearest cents, of your selection?

Answer 1

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F G 494 WACC 10% 495 Year 496 -80 Large Project Small Project -1000 500 400 497 500 498 -495 499 300 500 75 501 502 IRR NPU . I 14% 861,74 | 23% (834,55) 503

Formulas used:-

IRR=IRR(G496:G500,G494)

NPV=NPV($G$494,G497:G500)+G496

According to our decision rule we will choose the small project and but it has negative NPV why??

Because when Cashflows are non-conventional IRR rule may not give you proper decision. the non conventional Cashflow means the cash out Flow in the Upcoming years(years other than t=0).

I Hope my efforts will be fruitful to you...?