Calculate the IRR and NPV for each project.
-
Table 1. Synthetic Resin Cash Flows
Synthetic Resin
Year
0
1
2
3
4
5
Net Income
$150,000
$200,000
$300,000
$450,000
$500,000
Depreciation
$200,000
$200,000
$200,000
$200,000
$200,000
Net Cash Flow
$(1,000,000)
$350,000
$400,000
$500,000
$650,000
$700,000
Table 2. Epoxy Resin Cash Flows
Epoxy Resin
Year
0
1
2
3
4
5
Net Income
$440,000
$240,000
$140,000
$ 40,000
$ 40,000
Depreciation
$160,000
$160,000
$160,000
$160,000
$160,000
Net Cash Flow
$(800,000)
$600,000
$400,000
$300,000
$200,000
calculate the IRR and NPV for each project. Tim wants to convince the Board that the IRR measure can be misleading when choosing between mutually exclusive alternatives. Why is the IRR decision rule unreliable in making the correct choice between the two projects? Tim’s presentation should inform the board on the different reinvestment assumptions underlying IRR and NPV and how that relates to the reliability of the IRR decision rule. What is the correct reinvestment assumption and why?
