Question

You have to pick between three mutually exclusive projects with the following cash flows to the firm: Year Project A Project B Project C 0 -$10,000 $5,000 -$15,000 1 $8,000 $5,000 $10,000 2 $7,000 -$8,000 $10,000 The cost of capital is 12%. a. Which project would you pick using the NPV rule? b. Which project would you pick using the IRR rule? c. How would you explain the differences between the two rules? Which one would you rely on to make your choice?

Answer #1

1.The Hyatt Group Inc., has identified the following two
mutually exclusive projects:
Cash
Flows Cash
Flows
Year Project
A Project
B
0 -$10,000 _$10,000
1 200 5,000
2 500 6,000
3 8,200 500
4 4,800 500
What is the IRR of each of these projects? If you
apply the IRR decision rule, which project should the company
accept? Is this decision necessarily correct?
If the required rate of return is 9 percent, what is the NPV of
each of the projects? Which project will you choose if
you apply the NPV decision rule?
Over what range...

Homework - Capital Budgeting
1.The Hyatt Group Inc., has identified the following two
mutually exclusive projects:
Cash FlowsCash Flows
YearProject AProject B
0-$10,000_$10,000
1 200 5,000
2 500 6,000
3 8,200 500
4 4,800 500
a. What is the IRR of each of these projects? If you apply the
IRR decision rule, which project should the company accept? Is this
decision necessarily correct?
b. If the required rate of return is 9 percent, what is the
NPV of each of...

You are considering the following two
mutually exclusive projects with the following cash flows:
Project
A
Project B
Year Cash
Flow
Year Cash Flow
0
-$75,000
0 -$70,000
1
$19,000
1 $10,000
2
$48,000
2 $16,000
3
$12,000
3 $72,000
Required rate of
return
10
%
13 %
Calculate the NPV, IRR,...

You are considering the following two mutually exclusive
projects. The crossover rate between these two projects is ___
percent and Project ___ should be accepted if the required return
is greater than the crossover rate.
Year
Project A
Project B
0
−$21,000
−$21,000
1
7,000
15,040
2
7,000
5,000
3
15,000
7,060
Multiple Choice
12.59%; B
15.61%; A
15.61%; B
12.59%; A
16.70%; A

NPV verses IRR Consider the following cash flows on the two
mutually exclusive projects for the Bahamas Recreation Corporations
(BRC). Both projects require an annual return on 14%
Year Deep Water Fishing New Submarine Ride
0 -$850,000 -$1,650,000
1 320,000 810,000
2 470,000 750,000
3 410,000 690,000
a) If your decision rile is to accept the project with the
greater IRR, which project should you choose?
c) To be prudent, you compute the NPV for both projects. Which
project should you...

NPV versus IRR Consider the
following cash flows on two mutually exclusive projects for the
Bahamas Recreation Corporation. Both projects require an annual
return of 15 percent.
YEAR
DEEPWATER FISHING
NEW SUBMARINE RIDE
0
−$835,000
−$1,650,000
1
450,000
1,050,000
2
410,000
675,000
3
335,000
520,000
As a financial analyst for the company, you are asked the
following questions.
If your decision rule is to accept the project with the greater
IRR, which project should you choose?
Since you are fully...

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...

Consider the following cash flows on two mutually exclusive
projects for the Bahamas Recreation Corporation. Both
projects require an annual return of 15 percent.
As a financial analyst for thecompany, you are asked the
following questions.
a.If your decision rule is to accept the project with the
greater IRR, which project should you choose? Explain why
b. Since you are fully aware of the IRR rule's scale
problem, you calculate the incremental IRR for the cash
flows. Based on your computation, which project...

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. Project A has cash
flows of −$10,000, $5,100, $3,400, and $4,500 for Years 0 to 3,
respectively. Project B has cash flows of −$10,000, $4,500, $3,400,
and $5,100 for Years 0 to 3, respectively.
B-1 what is the
IRR of project A?
B-2 What is the
IRR of project B?
B-3 Based on
the IRR rule, which project should be accepted and why?
B-4 At what
required rate of...

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