NPV, IRR, and NPV profiles Thomas Company is considering two mutually exclusive projects. The firm, which has a 12% cost of capital, has estimated its cash flows as shown in the following table.
Project A
Project B
Initial investment (CF0)
$130,000
$85,000
Year (t)
Cash inflows (CFt)
1
$25,000
$40,000
2
35,000
35,000
3
45,000
30,000
4
50,000
10,000
5
55,000
5,000
a. Calculate the NPV of each project, and assess its acceptability.
b. Calculate the IRR for each project, and assess its acceptability.
c. Draw the NPV profiles for both projects on the same set of axes.
d. Evaluate and discuss the rankings of the two projects on the basis of your findings in parts a, b, and c.
e. Explain your findings in part d in light of the pattern of cash inflows associated with each project.
