Is this project worth doing?
Bring every cash flow back to today and the NPV rule decides. Then see when the IRR agrees with it, the five ways it can mislead, and what payback rules leave out.
Costs now, benefits later: compare them in today's dollars
Costs now, benefits later: compare them in today's dollars
Canning line or premium cider: IRR against NPV
- Find each project's IRR (show two rates that bracket it). Which project does the IRR rule pick?
- Find each project's NPV at 10%. Which project does the NPV rule pick? Do the two rules agree?
- Find the crossover rate of the two NPV profiles and use it to explain your answer to (b).
- Two more facts arrive. Last year the company paid an engineer $55,000 to design the canning line. And the premium cider would take sales from the regular cider: the regular line would bring in $22,000 less cash in each of years 1 and 2. Adjust the NPVs. Which project should the company choose?
| Project A | Project B | |
|---|---|---|
| Cost today (year 0) | $420,000 | $950,000 |
| Year 1 | $192,000 | $330,000 |
| Year 2 | $188,000 | $400,000 |
| Year 3 | $176,000 | $520,000 |
Final coming up and NPV versus IRR still feels slippery?
Bring your problem sets. We work through them together until every type feels routine.
Questions, answered.
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