Chapter 5, Problem 10PS

IRR rule Consider the following two mutually exclusive projects:

1. a. Calculate the NPV of each project for discount rates of 0%, 10%, and 20%. Plot these on a graph with NPV on the vertical axis and discount rate on the horizontal axis.
2. b. What is the approximate IRR for each project?
3. c. In what circumstances should the company accept project A?
4. d. Calculate the NPV of the incremental investment (B – A) for discount rates of 0%, 10%, and 20%. Plot these on your graph. Show that the circumstances in which you would accept A are also those in which the IRR on the incremental investment is less than the opportunity cost of capital.