Rashid Company’s

Two Alternative Investment Projects

i = 10%
Project X Project Y
Initial investment $42,000 $45,000
Year Operating cash inflows
1 14000 $28,000
2 14000 12,000
3 14000 10,000
4 14000 10,000
5 14000 10,000

NPVX = 14000x PVAIF i=10%, n=5 ) - 42,000

= (14000 x 3.7908 ) – 42000
= ()– 42000
= 11,071

NPVY =
=(28000 + 12000 + 10,000 + 10,000 + 10,000 )
(1+0.1)1 (1+0.1)2 (1+0.1)3 (1+0.1)4 (1+0.1)5
=
() - CFo
=- 45000
= 10,924

Calculation of IRR:
Project X Project Y
Initial investment $42,000 $45,000
Year Operating cash inflows
1 14000 $28,000
2 14000 12,000
3 14000 10,000
4 14000 10,000
5 14000 10,000
 Project X
NPVx i 1 = 10% 11071
i 2 = 20% -131.6
NPVy i1 10% 10924
i 1 = 22% -282

NPVx1 = 14000x (PVAIF i=10%, n=5 ) - 42,000

= (14000 x 3.7908 ) – 42000
= 53071.2 – 42000
= 11,071
NPVx2 = 14000x (PVAIF i=20%, n=5 ) - 42,000
= (14000 x 2.9906) – 42000
= 41868 – 42000
= -131

Formula = i1 + NPVx1 x ( i2–i1)

NPVx1 - NPVx2

IRRx = 0.1 + 11071 .x (0.2 -0.1) = 0.1+ 0.988 (0.1) = 0.1 + 9.89 = 19.9%
11071- (-131.6)

NPVy1 = 28,000 + 12,000 + 10,000 + 10,000 + 10,000

(1+0.1)1 (1+0.1)2 (1+0.1)3 (1+0.1)4 (1+0.1)5

= 55,924- 45000
= 10,924

NPVy2 = 28,000 + 12,000 + 10,000 + 10,000 + 10,000

(1+0.20)1 (1+0.20)2 (1+0.20)3 (1+0.20)4 (1+0.20)5

= (28000x0.833)+(12000x0.69)+(10000x0.5787)+(10000x0.4822)+(10000x0.401877) – 45000
= (23324+8280+5787+4822+4018)-45000
=46231-45000
=1231

NPVy2 = 28,000 + 12,000 + 10,000 + 10,000 + 10,000

(1+0.22)1 (1+0.22)2 (1+0.22)3 (1+0.22)4 (1+0.22)5

= 44718 – 45000
= -282
IRRy = 0.1 + 10,924 .x (0.22 -0.1) = 0.1+ 0.9748 (0.12) = 0.1 + 0.117 = 21.7%
10924 - (-282)