Questions: If Project A and Project B have the same total cash flows but Project A receives them earlier, how will their IRRs likely compare? Both projects will have the same IRR. It's impossible to determine without more information. Project B will likely have a higher IRR. Project A will likely have a higher IRR.

If Project A and Project B have the same total cash flows but Project A receives them earlier, how will their IRRs likely compare? Both projects will have the same IRR. It's impossible to determine without more information. Project B will likely have a higher IRR. Project A will likely have a higher IRR.
Transcript text: If Project $A$ and Project $B$ have the same total cash flows but Project A receives them earlier, how will their IRRs likely compare? Both projects will have the same IRR. It's impossible to determine without more information. Project B will likely have a higher IRR. Project A will likely have a higher IRR.
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Solution

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The answer is the last one: Project A will likely have a higher IRR.

Explanation: The Internal Rate of Return (IRR) is a measure of the profitability of an investment, calculated as the discount rate that makes the net present value (NPV) of all cash flows from the investment equal to zero. When comparing two projects with the same total cash flows, the timing of those cash flows becomes crucial.

  • If Project A receives cash flows earlier than Project B, the present value of those cash flows will be higher for Project A when discounted at the same rate. This is because money received sooner can be reinvested to earn additional returns.
  • As a result, Project A will have a higher IRR compared to Project B, since the IRR calculation takes into account the timing of cash flows and earlier cash flows contribute more to the overall return.

Therefore, Project A will likely have a higher IRR.

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