Question

Consider two projects. The first project pays benefits of $85 today and nothing else. The second project pays nothing today, nothing one year from now, but $104 two years from now. a. Which project would be preferred if the discount rate were 0%? b. What if the rate increased to 10%? c. Find the Internal Rate of Return.

Answer 1

Step-by-step explanation:

a )

Discount rate is 0%

NPV of first project = 85

NPV of second project = 0 + 0 + 104 = 104

second project is preferrable .

b )

if discount rate is 10%

NPV of first project = 85

NPV of second project = 104 / 1.1²

= 85.95

Their NPV is almost the same so anyone can be preferred .

c ) IRR can not be calculated unless the cost of project or cash outflow is given .