## Answers

NPV of project A = Initial cost + PV of cash flows

= -9.8+ 2/7.8%

=$15.84 million

IRR is that rate at which

9.8 = 2/IRR

IRR = 2/9.8= 20.41%

NPV of project B = Initial cost + PV of cash flows

= -9.8+ 1.45/(7.8%-2.6%)

=$18.08 million

IRR is that rate at which

9.8 = 1.45/ (IRR-0.026)

IRR- 0.026 = 1.45/9.8 = 0.147959

IRR = 0.147959+ 0.026

= 17.39%

A: Project A has a higher IRR.

B: Project B will be chosen since it has higher NPV and hence the value of the business increases.

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