Question

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 NPV and IRR methods will select the same project if the cost of capital is less than 10 percent; for example, 8 percent. c. To determine if a ranking conflict will occur between the two projects the cost of capital is needed as well as an additional piece of information. d. Project L should be selected at any cost of capital, because it has a higher IRR. e. Project S should be selected at any cost of capital, because it has a higher IRR.

Answer #1

The answer is

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.

IRR is the rate at which NPV = 0

Higher the IRR, better it is

Since the NPV profiles cross at 10%, it means that the project
with higher IRR will have lower NPV below 10%

Hence, Both IRR and NPV will produce same result if the cost of
capital is greater than 10% (i.e. project with higher IRR)

However, the methods will conflict if the cost of capital is below 10%

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...

Two projects being considered are mutually exclusive and have
the following cash flows:
Year
Project A
Project B
0
−$50,000
−$50,000
1
15,625
0
2
15,625
0
3
15,625
0
4
15,625
0
5
1,562
89,500
If the required rate of return on these projects is 13 percent,
which would be chosen and why?
a.
Project B because of higher NPV.
b.
Project B because of higher IRR.
c.
Project A because of higher NPV.
d.
Project A because of...

Two projects being considered are mutually exclusive and have
the following cash flows:
Year
Project A
Project B
0
−$50,000
−$50,000
1
15,625
0
2
15,625
0
3
15,625
0
4
15,625
0
5
1,562
89,500
If the required rate of return on these projects is 13 percent,
which would be chosen and why?
a.
Project B because of higher NPV.
b.
Project B because of higher IRR.
c.
Project A because of higher NPV.
d.
Project A because of...

Projects T and Q are mutually-exclusive investment
alternatives, Each project requires a net investment of $20,000,
followed by a series of positive net cash flows. Both projects have
a useful life equal to 10 years. Project T has an NPV of $36,000 at
a 0% discount rate, while project Q has an NPV of $30,000 at 0%.
Furthermore, at a discount rate of 15 percent, the two projects
have identical positive NPVs. Given this, which of the following
statements is...

Tara is evaluating two mutually exclusive capital
budgeting projects that have the following characteristics:
Cash Flows
Year
Project Q
Project R
0
$(4,000)
$(4,000)
1
0
3,500
2
5,000
2,100
IRR
11.8%
28.40%
If the firm's required rate of return (r) is 10 percent, which
project should be purchased?
a.
Both projects should be purchased, because the IRRs for both
projects exceed the firm's required rate of return.
b.
Neither project should be accepted, because their NPVs are too
small...

Tara is evaluating two mutually exclusive capital
budgeting projects that have the following characteristics:
Cash Flows
Year
Project Q
Project R
0
$(4,000)
$(4,000)
1
0
3,500
2
5,000
2,100
IRR
11.8%
28.40%
If the firm's required rate of return (r) is 10 percent, which
project should be purchased?
a.
Both projects should be purchased, because the IRRs for both
projects exceed the firm's required rate of return.
b.
Neither project should be accepted, because their NPVs are too
small...

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...

Project S has a cost of $10,000 and is expected to produce
benefits (cash flows) of $3,000 per year for 5 years. Project L
costs $25,000 and is expected to produce cash flows of $7,400 per
year for 5 years. Calculate the two projects' NPVs (in dollars),
assuming the cost of capital of 10%. (Round your answers to the
nearest cent.)
S$
L$
Calculate the two projects' IRRs (as percents), assuming the
cost of capital of 10%. (Round your answers...

A firm must choose between two mutually exclusive projects, A
& B. Project A has an initial cost of $11000. Its projected net
cash flows are $900, $2000, $3000, $4000, and $5000 at the end of
years 1 through 5, respectively. Project B has an initial cost of
$15000, and its projected net cash flows are $7000, $5000, $3000,
$2000, and $1000 at the end of years 1 through 5, respectively. If
the firm’s cost of capital is 6.00%:
The...

Answer the following questions.
A company is analyzing two mutually exclusive
projects, S and L, whose cash flows are shown below:
Year 0
Year 1
Year 2
Year 3
Year 4
Cashflow for S
-200
150
100
10
10
Cashflow for L
-200
10
10
100
250
Assume the company can get an unlimited amount of capital at
that cost.
WACC
NPV (S)
NPV (L)
5%
10%
15%
20%
25%
What is the internal rate of return (IRR) for...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 2 minutes ago

asked 2 minutes ago

asked 2 minutes ago

asked 2 minutes ago

asked 3 minutes ago

asked 3 minutes ago

asked 3 minutes ago

asked 7 minutes ago

asked 10 minutes ago

asked 10 minutes ago

asked 10 minutes ago

asked 10 minutes ago