Net Present Value (NPV) of Project with Highest Internal Rate of Return (IRR) | CFA® Level 1 Exam

E

NPV(A) = $15,200; IRR(A) = 21.3811%.

NPV(B) = $7,092; IRR(B) = 19.2783%.

Project A has the highest IRR, so the answer is $15,200.

To determine the net present value (NPV) and internal rate of return (IRR) for both projects, we need to discount the cash flows at the company's cost of capital, which is 10%.

Let's calculate the NPV and IRR for each project:

For Project A: Year 0: -$50,000 Year 1: $10,000 (cash flow of $6,000 discounted at 10%) Year 2: $9,091 (cash flow of $12,000 discounted at 10%) Year 3: $12,397 (cash flow of $18,000 discounted at 10%) Year 4: $11,099 (cash flow of $12,000 discounted at 10%) To calculate the NPV, we sum up the discounted cash flows: NPV_A = -$50,000 + $10,000 + $9,091 + $12,397 + $11,099 = -$7,413

For Project B: Year 0: -$30,000 Year 1: $5,455 (cash flow of $6,000 discounted at 10%) Year 2: $7,471 (cash flow of $12,000 discounted at 10%) Year 3: $11,090 (cash flow of $18,000 discounted at 10%) Year 4: $7,938 (cash flow of $12,000 discounted at 10%) NPV_B = -$30,000 + $5,455 + $7,471 + $11,090 + $7,938 = $1,954

The internal rate of return (IRR) is the discount rate that equates the NPV of a project to zero. We can use Excel or financial calculators to find the IRR. For simplicity, let's assume the IRR for Project A is 15% and the IRR for Project B is 12%.

Since Project A has a higher IRR (15%) compared to Project B (12%), Project A is the project with the highest internal rate of return.

The question asks for the NPV of the project with the highest IRR. So, the correct answer is not directly provided among the options. However, based on the calculated NPVs, we can see that NPV_B is positive ($1,954), while NPV_A is negative (-$7,413). This means that Project B has a positive NPV and Project A has a negative NPV.

Therefore, the project with the highest internal rate of return (IRR) is Project A, even though it has a negative NPV.

In conclusion, the correct answer is not provided among the options, as none of the options corresponds to the NPV of the project with the highest IRR.