You are choosing between two projects. The cash flows for the projects are given in the...

a. The IRR is the rate at which the NPV of a project is zero.

So, let us first calculate the IRR of Project A :

($50 ) + $25/ (1 + IRR)^1 + $20/(1 + IRR)^2 + $19/(1 + IRR)^3 + $16/(1+ IRR)^4 = 0

= 23.9%

Similarly, the IRR for project B is :

= 19.2%

b. If the discount rate is 5.4%, the NPV of project A is :

= ($50) + $25/ (1.054)^1 + $20/(1.054)^2 + $19/(1.054)^3 + $16/(1.054)^4

= $20.9136

Simialrly, the NPV of Project B is :

= $40.8948

c. The IRR and NPV rank projects differently because of the different reinvestment rate assumption. The NPV assumes that the cash flows are reinvested at the cost of capital, the IRR assumes that the cash flows are reinvested at the IRR.

The NPV is a more reliable measure and gives accurate results in comparison to the IRR.