Question

Is it true that we can only use the IRR to compare 2 projects, if both...

Is it true that we can only use the IRR to compare 2 projects, if both projects have: 1)the same initial Investment amount and 2) the same life time?

If so, how do we compare two projects that do not fulfil both of the aforementioned criteria by means of IRR?

Could you Maybe come up with a numerical example? Thanks a lot

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

IRR is that rate at which the NPV of cash flows is zero. We can use IRR even if one of the conditions is not satisfied since it gives the internal rate of return of the projects cash flows.

For example:

Year ProjectA Project B
0 -5000 -10000
1 500 500
2 1000 1000
3 1500 2500
4 2000 4000
5 2500 5500
IRR 12.01% 7.97%

We see that the IRR of the project with higher investmet is lower. So we should pick the project with lower investment since it has higher Internal return.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
4. Internal rate of return (IRR) The internal rate of return (IRR) refers to the compound...
4. Internal rate of return (IRR) The internal rate of return (IRR) refers to the compound annual rate of return that a project generates based on its up-front cost and subsequent cash flows. Consider the case of Blue Llama Mining Company: Blue Llama Mining Company is evaluating a proposed capital budgeting project (project Sigma) that will require an initial investment of $800,000. The company has been basing capital budgeting decisions on a project’s NPV; however, its new CFO wants to...
1. Why do we use percentage returns rather than dollar returns when we compare returns? 2....
1. Why do we use percentage returns rather than dollar returns when we compare returns? 2. Last year your portfolio made 15%; the stock market made 10%, and the risk free rate was 2%. If the CAPM is correct, what must the beta of your portfolio be? 3. The world can change but basic financial math doesn’t. The obvious decreases in future cash flows from the virus is bringing stocks down. What is the other, probably more important factor driving...
19. Your division is considering two investment projects, each of which requires an up-front expenditure of...
19. Your division is considering two investment projects, each of which requires an up-front expenditure of $24 million. You estimate that the cost of capital is 12% and that the investments will produce the following after-tax cash flows (in millions of dollars): Year Project A Project B 1 5 20 2 10 10 3 15 8 4 20 6 What is the regular payback period for each of the projects? Round your answers to two decimal places. Project A: _years...
Categorical imperative = universal moral law •Formulation 1: Act only on that maxim you could at...
Categorical imperative = universal moral law •Formulation 1: Act only on that maxim you could at the same time will to become universal law. •Formulation 2: Treat humans always as ends in themselves, never as means only. a) Brainstorm an example of an ethical situation (like Kant’s examples of suicide, failing to keep promises, wasting talents, or neglecting others) b) Explain in your own words how BOTH formulations of the categorical imperative require that you act in one way and...
1. Calculating project cash flows: Why do we use forecasted incremental after-tax free cash flows instead...
1. Calculating project cash flows: Why do we use forecasted incremental after-tax free cash flows instead of forecasted accounting earnings in estimating the NPV of a project? 2. The FCF calculation: How do we calculate incremental after-tax free cash flows from forecasted earnings of a project? What are the common adjustment items? 3. The FCF calculation: How do we adjust for depreciation when we calculate incremental after-tax free cash flow from EBITDA? What is the intuition for the adjustment? 4....
Required information Chapter 17 Case: Reducing Ambiguity in Business Requirements The number one reason projects fail...
Required information Chapter 17 Case: Reducing Ambiguity in Business Requirements The number one reason projects fail is bad business requirements. Business requirements are considered “bad” because of ambiguity or insufficient involvement of end users during analysis and design.     A requirement is unambiguous if it has the same interpretation for all parties. Different interpretations by different participants will usually result in unmet expectations. Here is an example of an ambiguous requirement and an example of an unambiguous requirement: • Ambiguous requirement:...
Net present value (NPV) Evaluating cash flows with the NPV method The net present value (NPV)...
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...
1. Net present value (NPV) Evaluating cash flows with the NPV method The net present value...
1. 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 Happy Dog Soap Company is evaluating a proposed capital budgeting project (project Beta) that will require an initial investment of $3,225,000. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $375,000 Year 2 $425,000...
‘IT’S HALFTIME AMERICA’ – REVISIT (THIS TIME FOR PERSUASIVE TACTICS USED) One more time, here’s the...
‘IT’S HALFTIME AMERICA’ – REVISIT (THIS TIME FOR PERSUASIVE TACTICS USED) One more time, here’s the transcript of the commercial (you can also rewatch the commercial to refresh your memory – it’s only a couple minutes). Transcript of the commercial: It’s halftime. Both teams are in their locker room, discussing what they can do to win this game in the second half. It’s halftime in America too. People are out of work, and they’re hurting. They’re all wondering what they’re...
Which of the following distinguishes scenario analysis from sensitivity analysis? a. Scenario analysis only applies to...
Which of the following distinguishes scenario analysis from sensitivity analysis? a. Scenario analysis only applies to new product development projects. b. Sensitivity analysis only applies to new product development projects c. Sensitivity analysis involves changing one project variable at a time while scenario analysis involves changing more than one project variable at the same time d. Sensitivity analysis only applies when projects are mutually exclusive. 3. Which of the following statements is true regarding the internal rate of return (IRR)?...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT