Question

IRR Applicability For what range of possible interest rates would you want to use IRR to choose between these two projects? For what range of rates would you NOT want to use IRR?

Time	Project A Cash Flow	Project B Cash Flow
0	–$725	–$850
1	100	200
2	250	200
3	250	200
4	200	200
5	100	200
6	100	200
7	100	200

Answer 1

Rate	NPV (A)	NPV (B)
2%	$300.11	$444.40
4%	$232.72	$350.41
6%	$171.89	$266.48
8%	$116.82	$191.27
10%	$66.81	$123.68
12%	$21.27	$62.75
14%	($20.30)	$7.66
16%	($58.34)	($42.29)
18%	($93.25)	($87.69)
19.17%	($112.28)	($112.28)
20%	($125.34)	($129.08)

Calculate NPV for a range of rates as shown in the table above.

Secondly, IRR can be calculated using the same function in excel or calculator given the cash flows.

IRR for A = 13.00% and IRR for B = 14.29%

As IRR for B is higher, select Project B.

However, as you can see after the crossover rate (19.17%), NPV for A is higher than NPV for B.

Hence, if the interest rate is below 19.17%, use IRR method because IRR and NPV leads to the same outcome. However, after the crossover rate, use NPV method.