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Greenpower Energy Cost of Capital: IRR, NPV

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Greenpower Energy is considering two mutually exclusive projects. Both projects require an initial investment of $10,000. Project S is expected to produce cash flows of $1000, $2000, $6000, and $7000 in year 1, year 2, year 3, and year 4 respectively. Project Q is expected to produce cash flows of $6000, $5000, $2000, and $1000 in year 1, year 2, year 3, and year 4 respectively. The cost of capital for Greenpower is 10%.

(1) Which project should be chosen based on IRR?
(2) Which project should be chosen based on NPV?
(3) What is the crossover rate (also called Fisher Interception) for the two projects?

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The expert examines the Greenpower Energy cost of capital for IRR and NPV.

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THE COST OF CAPITAL

Greenpower Energy is considering two mutually exclusive projects. Both projects require an initial investment of $10,000. Project S is expected to produce cash flows of $1000, $2000, $6000, and $7000 in year 1, year 2, year 3, and year 4 respectively. Project Q is expected to produce cash flows of $6000, $5000, $2000, and $1000 in year 1, year 2, year 3, and year 4 respectively. The cost of capital for Greenpower is 10%.

(1) Which project should be chosen based on IRR?
Project S
Discount rate Discount factor Discounted cashflow
Year Cashflows ;+NPV ;-NPV ;+NPV ;-NPV ;+NPV ;-NPV
0 -10,000 (A) 16% 17% 1.0 =(1 + 16%)^Year 1.0 (B) -10,000.0 =A/B -10,000.0
1 1,000 16% 17% 1.2 1.2 =(1 + ...

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Chidi Ngene, M. Sc.
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  • B. Sc., University of Nigeria
  • M. Sc., London South Bank University
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