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Finance problem 4-7 – Gardial Fisheries

December 16, 2020

Questions 4-7 are based on the following example:
Gardial Fisheries is considering two mutually exclusive investments. The forecasted cash flows for each project is as follows:

Year Project A ($) Project B ($)
0 -375 -575
1 -300 190
2 -200 190
3 -100 190
4 600 190
5 600 190
6 926 190
7 -200 0

4. If each project has a cost of capital of 12%, what is the NPV for each project? Based on this, which project would you select?

5. If each project has a cost of capital of 17%, what is the NPV for each project? Based on this, which project would you select?

6. What is the IRR, for each project? Based on the IRR, which project should be selected?

7. If there is a conflict between your decision using the NPV method and your decision using the IRR method, which method takes precedence? Why?