Consider the two investments below. The cash flows, as well as the NPV and IRR, for the two investments are given. For both investments, the required rate of return is 10%.
Cash Flows | |||||||
Year | 0 | 1 | 2 | 3 | 4 | NPV | IRR (%) |
Investment 1 | −100 | 36 | 36 | 36 | 36 | 14.12 | 16.37 |
Investment 2 | −100 | 0 | 0 | 0 | 175 | 19.53 | 15.02 |
What discount rate would result in the same NPV for both investments?
- A rate between 0.00% and 10.00%
- A rate between 10.00% and 15.02%
- A rate between 15.02% and 16.37%
You have to calculate the fisherian rate of return here
If the npv and irr of the two projects is conflicting means npv ke hisab se project A choose karenge aur irr ke hisab se project B it means that kc is less than the fisherian rate of return
So in this question the fisherian rate must be greater than 10% that is op b
as both the npv are positive at r=10% therefore the rate at which the npv of both the projects will be same will be above 10% and below 15.02%because at that rate the npv of one project =0
to check it you can do the following
cf0=0{-100-(-100)}
cf1=36-0=36 f01=3
cf2=36-175= -139 f02=1
irr-cpt=13.15
which lies between 10% and 15.02% hence option (b)