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 FlowsYear01234NPVIRR (%)Investment 1−1003636363614.1216.37Investment 2−10000017519.5315.02
Q. 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%
Solution
B is correct. For these investments, a discount rate of 13.16% would yield the same NPV for both (an NPV of 6.73).
