Question

If mutually exclusive projects with normal cash flows are being analyzed, the net present value (NPV) and internal rate of return (IRR) methods agree.

Projects Y and Z are mutually exclusive projects. Their cash flows and NPV profiles are shown as follows.

Year |
Project Y |
Project Z |
---|---|---|

0 | –$1,500 | –$1,500 |

1 | $200 | $900 |

2 | $400 | $600 |

3 | $600 | $300 |

4 | $1,000 | $200 |

If the weighted average cost of capital (WACC) for each project is 14%, do the NPV and IRR methods agree or conflict?

The methods conflict.

The methods agree.

When there is a conflict, a key to resolving this it is the
assumed reinvestment rate. The IRR calculation assumes that
intermediate cash flows are reinvested at the _________ , and the
NPV calculation implicitly assumes that the rate at which cash
flows can be reinvested is the ___________ . Fill in the blank
options: **(IRR, MIRR, Required rate of return)**

As a result, when evaluating mutually exclusive projects, the
(**NPV METHOD OR IRR METHOD**) is usually the better
decision criterion.

Answer #1

calc:

The IRR calculation assumes that intermediate cash flows are
reinvested at the **IRR(internal rate of return)**,
and the NPV calculation implicitly assumes that the rate at which
cash flows can be reinvested in the **WACC**

**NPV METHOD** is usually the better decision
criteria.

6. Understanding the NPV profile If projects are mutually
exclusive, only one project can be chosen. The internal rate of
return (IRR) and the net present value (NPV) methods will not
always choose the same project. If the crossover rate on the NPV
profile is below the horizontal axis, the methods will agree.
Projects Y and Z are mutually exclusive projects. Their cash flows
and NPV profiles are shown as follows. Year Project Y Project Z 0
–$1,500 –$1,500 1...

Two mutually exclusive projects each have a cost of $10,000. The
total, undiscounted cash flows from Project L are $15,000, while
the undiscounted cash flows from Project S total $13,000. Their NPV
profiles cross at a discount rate of 10 percent. Which of the
following statements best describes this situation? Please leave an
explanation. a. The NPV and IRR methods will select the
same project if the cost of capital is greater than 10 percent; for
example, 18 percent. b. The...

Projects A and B are mutually exclusive and have the following
cash flows:
Year
Project A
Project B
0
-$82,000
-$82,000
1
34,000
0
2
34,000
0
3
34,000
108,000
1. What is the crossover rate?
2. Do we have a conflict in ranking between the NPV and IRR
methods if the required rate of return is 8%?
3. Which project should be accepted if the required rate of
return is 5%?
4. Which project should be accepted if the...

Kilroy, Inc. is considering two mutually exclusive projects. The
cash flows of the projects are as follows:
Year
Project A
Project B
0
-$2,000,000
-$2,000,000
1
500,000
2
500,000
3
500,000
4
500,000
5
500,000
6
500,000
7
500,000
5,650,000
a. Compute the NPV and IRR for the above two projects, assuming
a 13% required rate of return. NPV for project A=
b. Discuss any potential conflict in evaluating these candidate
projects.
c. What decision should be made regarding these...

Which of the following statements is CORRECT? Assume that the
project being considered has normal cash flows, with one outflow
followed by a series of inflows. a. The IRR calculation implicitly
assumes that all cash flows are reinvested at the WACC. b. If a
project has normal cash flows and its IRR exceeds its WACC, then
the project’s NPV must be positive. c. If Project A has a higher
IRR than Project B, then Project A must also have a...

Consider the three mutually exclusive projects that follow. The
firm's MARR is 9% per year.
EOY
Project 1
Project 2
Project 3
0
−$10,000
−$9,000
−$10,000
1−3
$5,130.54
$4,713.45
$4,926.60
a. Calculate each project's PW.
PW1 =$___________(Round to the nearest dollar.)
PW2=$____________(Round to the nearest dollar.)
PW3=$____________(Round to the nearest dollar.)
b. Determine the IRR of each project.
IRR1=_________%.(Round to one decimal place.)
IRR2=_________%.(Round to one decimal place.)
IRR3=_________%.(Round to one decimal place.)
c. Which project would you...

Net present value (NPV)
Evaluating cash flows with the NPV method
The net present value (NPV) rule is considered one of the most
common and preferred criteria that generally lead to good
investment decisions.
Consider this case:
Suppose Blue Hamster Manufacturing Inc. is evaluating a proposed
capital budgeting project (project Beta) that will require an
initial investment of $2,750,000. The project is expected to
generate the following net cash flows:
Year
Cash Flow
Year 1
$325,000
Year 2
$475,000
Year...

Gardial Fisheries is considering two mutually exclusive
investments. The projects' expected net cash flows are as
follows:
Expected Net Cash Flows
Time Project A Project B
0 ($375) ($575)
1 ($300) $190
2 ($200) $190
3 ($100) $190
4 $600 $190
5 $600 $190
6 $926 $190
7 ($200) $0
a. If each project's cost of capital is 12%, which project
should be selected? If the cost of capital is 18%, what project is
the proper choice?
@ 12% cost...

Projects Y and Z are mutually exclusive projects. Assume the
company has a WACC of 14%.
Year
Project Y
Project Z
0
-$1,500
-$1,500
1
200
900
2
400
600
3
600
300
4
1,000
200
What is the NPV of project Y?
[ Select ] Possible Answer:
["22.04", "-19.71", "-10.33", "10.58"]
What is the NPV of project Z?
[ Select ]...

You've estimated the following cash flows (in $) for two
mutually exclusive projects:
Year
Project A
Project B
0
-5,600
-8,400
1
1,325
1,325
2
2,148
2,148
3
4,193
8,192
The required return for both projects is 8%.
Part 1 : What is the IRR for project A? 3+ Decimals
Part 2 What is the IRR for project B? 3+ Decimals
Part 3 Which project seems better according to the IRR method?
Project A or Project B
Part 4 What...

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