Required Rate

10%
(Financing Rate and Investment Rate)
Period

Project A
0
1
2
3
4
5

Project B
-1000
-1000
0
400
200
400
300
300
500
300
900
200

1,000.00
800.00
600.00

400.00

B
200.00

12.48

0.00
0
NPV
291.02
248.70
(200.00)
IRR
17.32%
20.49%
PI
1.29
1.25
(400.00)
Modified IRR
15.77%
15.00%
NOTE:IF VALUE IS 0,YOU CANNOT LEAVE IT EMPTY!

0.05

0.1

0.15

0.2

0.25

0.3

There are two projects, A and B. Their five-period cash flows are given as shown in the above table. By
using NPV, IRR, MIRR, and PI functions, I calculated those values for both projects as highlighted. I
would like to simply explain the difference between IRR and MIRR, and how to measure PI.

Setting different discount rates, I worked out corresponding NPVs for project A and B shown in the
following table and generated a rate-NPV chart as shown above. There is a cross point for the two
projects. From the chart, we can tell project A has higher NPV when rate is lower than the cross rate, vice
versa. What is the cross rate and cross NPV?

NPV A
Rate
0
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
11%
12%
13%
14%
15%
16%
17%
18%
19%
20%
21%
22%
23%
24%

NPV B
Rate

NPV
900.00
824.05
752.01
683.65
618.75
557.08
498.46
442.71
389.66
339.14
291.02
245.15
201.42
159.69
119.86
81.82
45.48
10.74
(22.48)
(54.26)
(84.68)
(113.81)
(141.72)
(168.46)
(194.10)

0
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
11%
12%
13%
14%
15%
16%
17%
18%
19%
20%
21%
22%
23%
24%

NPV
600.00
557.92
517.62
479.00
441.96
406.43
372.32
339.56
308.08
277.81
248.70
220.68
193.70
167.70
142.65
118.50
95.20
72.71
51.00
30.04
9.77
(9.81)
(28.75)
(47.08)
(64.81)

The process to calculate the cross rate is as following:

Period
0
1
2
3
4
5
NPV

Project A
-1000
0
200
300
500
900
181.03

Project B
-1000
400
400
300
300
200
181.03

A-B
0
-400
-200
0
200
700
12.48%

The cross rate is the IRR of A-B cash flows. To check it, I calculated the NPV for project A and B by
the cross rate, 12.48%, and got the same value (cross NPV). According to the result, we know that project
As NPV is higher than project Bs when the discount rate is lower than 12.48%, and A should be
selected; otherwise B would be selected. In the case that the required rate is set as 10%, we know A is
better than B by NPV approach; however, Bs IRR is higher than As. In this situation, NPV dominates
over IRR because IRR has some flaws.

Discount rate

Year
0
1
2
3

15% Investment rate

finacing rate
CF
-90000
132000
100000
-150000

Total
NPV
IRR
MIRR
PI

1,769.54
10.11%
13.76%
1.01

Discount Rate
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
55%
60%
65%
70%

NPV
(8,000.00)
(3,158.41)
(52.59)
1,769.54
2,638.89
2,800.00
2,435.14
1,681.15
641.40
(605.60)
(2,000.00)
(3,496.02)
(5,058.59)
(6,660.82)
(8,282.11)

14%
13%

Inflows

0
1
2
3

Outflows
0
90000
132000
0
100000
0
0
150000
190,396.98 188,627.43

42.66%

NPV
4,000.00
2,000.00
-

0%

20%

40%

60%

80%

(2,000.00)
NPV
(4,000.00)
(6,000.00)
(8,000.00)
(10,000.00)

One of the flaws is multiple IRRs. From the above case, I found two rates under which NPV is zero. It
seems to be a great project with a 42.66% IRR, but it has another rather low IRR and its NPV turned into
negative when its required rate is lower to a certain level. Thus, NPV approach is more reliable.
In this case, the denominator in the PI function is replaced by the total present value of cash outflows as
there comes out another negative cash flow after several positive ones. This is also the reason why two
IRRs are generated. Commonly thinking, it is not a bad project if PI is over 1.

If you have multiple projects and a limited budget, how would you maximize your project portfolio?

Size of Capital Budget

Project
1
2
3
4
5
6
7
8
9
Total

6400

Cost
NPV
1 yes, 0 no
Cost
NPV
1000
100
0
0
0
1500
120
0
0
0
500
300
1
500
300
850
420
1
850
420
2000
680
1
2000
680
2500
800
1
2500
800
790
208
0
0
0
320
186
1
320
186
180
60
1
180
60
9,640.00 2,874.00
6,350.00 2,446.00

In this case, assuming the capital budget is $6,400, there are 9 possible projects with different cost and
NPV. By Solver, I set the goal to maximize NPV with constraints: (i) total selected costs is equal to or
less than $6,400, (ii) all values in the 4th column equal to 0 or 1. In terms of the consequence, it is most
beneficial to select project 3, 4, 5, 6, 8, and 9, the total cost would be $6,350 that is lower than $6,400,
and the portfolio NPV would be $2,446.