The IRRs of the two projects
You are analyzing two mutually exclusive projects with the cash flows shown below. The cash flows are in millions. Both projects are equally risky. Your costs of capital are 10%.
Year Project 1 Project 2
0 -$300 -$400
1 $100 $150
2 $90 $140
3 $80 $100
4 $70 $80
5 $60 $60
6 $50 $50
7 $40 $40
8 $30 $30
9 $20 $20
10 $10 $10
a. Compute the NPVs of the two projects.
b. Compute the IRRs of the two projects.
c. Compute the simple payback periods of the two projects.
d. Compute the discount rate where you are indifferent between the projects.
e. Which project should you execute? Briefly explain why.