Construct the NPV profiles for the two projects. Identify the IRR for both projects on the graph and explain the relevance of the crossover point. At the cost of capital,which projects would the NPV and IRR decision rules accept?

In order to answer this question you will need to have the text book,

The NPV profiles for the two projects can be constructed as follows:

Project 1 NPV = -$10,000 + $2,500(1/1.08)^1 + $5,000(1/1.08)^2 + $7,500(1/1.08)^3 = $3,828.32

Project 2 NPV = -$20,000 + $6,500(1/1.05)^4 + $9,000 (1/18.05)^5 = 6247.23

The Internal Rate of Return (IRR) is computed by finding the discount rate at which the present value of a project’s cash flows equals zero and it can be identified on each graph as the point where they intersect with the x-axis or “zero line”.

In this case both projects have an IRR of 10% meaning that if their expected returns are higher than this then investing in them would make financial sense since it implies that more money could be generated from taking such a risk versus putting it into a guaranteed return instrument like a bank savings account.

Finally, when evaluating these two investments using either the NPV or IRR decision rules one should always compare them to their respective cost of capital figures (i.e., 8% and 5%) since any project that has an IRR greater than its cost will produce positive net present values while those with lower numbers will not be accepted under these criteria.
Therefore based on these conditions both projects would receive approval according to the NPV rule while only Project 1 would pass muster under IRR due to its higher ROI potential compared to Project.