Question

What discount rate is most appropriate for net present value
calculations of large-scale projects? Of small projects? Of the
quantity of inventories to hold?

Answer #1

project leverage (debt structure) changes over time, which will
change overall project risk. Hence the use of Single

Discount Rate for Large-Scale Project is inappropriate. Multiple
discount rate (MDR) takes into consideration the change in the
leverage of the project. The adjustment can be made if one can
fairly estimate leverage risk which generally decreases as business
goes overtime. Mandron [2000] advocated the use of MDR in
large-scale project valuation which considers the changes in the
capital structure of a project as well as the distribution of
overall project risk in time. So, MDR is recommended over single
discount rate.

For more detail kindly see

Mandron, A. “Improved Techniques for Valuing Large-Scale Projects: A Follow-Up.” The Journal of Structured Finance, Vol. 6, No. 1 (2000), pp. 33-45.

Net Present Value and Competing Projects
For discount factors use Exhibit 12B.1 and Exhibit 12B.2.
Spiro Hospital is investigating the possibility of investing in
new dialysis equipment. Two local manufacturers of this equipment
are being considered as sources of the equipment. After-tax cash
inflows for the two competing projects are as follows:
Year
Puro Equipment
Briggs Equipment
1
$320,000
$120,000
2
280,000
120,000
3
240,000
320,000
4
160,000
400,000
5
120,000
440,000
Both projects require an initial investment of $560,000....

What causes conflicts in the ranking of projects via net present
value and internal rate of return? Please explain in
detail.

The
i thermal rate of return is:
The discount rate that makes the net present value of a
project equal to the initial cash outlay.
Equivalent to the discount rate that makes the net present
value equal to one.
Tedious to compute without the use of either a Financial
calculator or a computer.
Highly dependent upon the current interest rates offered in
the marketplace.
A better methodology than net present value when dealing with
unconventional cash flows.

What is the present value of the following cash flows, given an
appropriate discount rate of 3.98% (to the nearest penny)?
Year 1
$3,593
Year 2
$2,157
Year 3
$7,824
Year 4
$36,542
Year 5
6,369

The internal rate of return is the discount rate at which the
net present value is Select one:
a. positive.
b. There is no relationship between these two concepts.
c. equal to zero.
d. negative.

11.
The discount rate that makes the net present value of an
investment exactly equal to zero is the:
A)
Payback period.
B)
Internal rate of return.
C)
Average accounting return.
D)
Profitability index.
E)
Discounted payback period.
12.
The internal rate of return (IRR) rule can be best stated
as:
A)
An investment is acceptable if its IRR is exactly equal to its
net present value (NPV).
B)
An investment is acceptable if its IRR is exactly equal to...

The discounted payback rule may cause:
Both some positive net present value projects to be rejected;
and some projects with negative net present values to be
accepted.
projects to be incorrectly accepted due to ignoring the time
value of money.
some positive net present value projects to be rejected. some
projects with negative net present values to be accepted.
the most liquid projects to be rejected in favor of less liquid
projects.

Why does the Net Present Value change depending on discount rate
being used?

The net present value of a project is $260000 at the discount
rate of 14.0 percent. Which of the following could be the IRR of
this project?
a)11.6
b)12.29
c)11.6
d)11.96
e)16.6

What is the present value of a 3-year annuity of $300 if the
discount rate is 7%? (Do not round intermediate
calculations. Round your answer to 2 decimal places.)
b. What is the present value of the annuity in (a)
if you have to wait an additional year for the first payment?
(Do not round intermediate calculations. Round your final
answer to 2 decimal places.)

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