Question

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

Answer #1

In case of independent projects, there is no need to worry about which project to accept, but in the case of mutually exclusive projects , we need to choose between one project. Conflict occurs when both these methods provide conflicting results.

The reinvestment rate assumption of the NPV and the IRR is different. The NPV assumes that the cash flows are reinvested at the cost of capital while the IRR assumes that the cash flows are reinvested at the IRR. So, the project with a higher NPV should be chosen as the NPV method provides accurate results. The IRR is unrealistic in comparison to the NPV.

1(a). (TRUE or FALSE?) Whenever there is a ranking conflict
between net present value and internal rate of return we generally
suggest that the project with the highest net present value be
chosen.
1(b). (TRUE or FALSE?) The acceptable independent projects can
be ranked by using the IRR methodology, from lowest to the highest
IRR.
1(c). (TRUE or FALSE?) When evaluating proposed projects with
the IRR method, those projects with IRRs that are less than the
required rate of return...

Explain in detail under what circumstances the Net Present Value
(NPV) and Internal Rate of Return (IRR) could provide different
decisions. Which method would you follow in the case of such
inconsistent conclusions?

The net present value, internal rate of return, and the
profitability index methods can give different rankings to mutually
exclusive projects in certain cases. Which of the following is one
of the possible reasons that causes contradictory rankings? A.
Project lives of different durations B. Projects have similar costs
C. Projects have a similar trend of cash flows D. Projects have
different accounting rates of return

explain net present value relative to the internal rate of
return is superior measure in project valuation

How does the use of payback period, net present value, and
internal rate of return for capital budgeting projects connect
directly with a firm’s strategic goals?
What factors in the political, business, and economic climate
or environment have a direct correlation to capital budgeting
projects? What potential short-term and long-term impact on capital
budgeting projects might these factors have?

Calculate the discounted payback, net present value, and
internal rate of return for the following cash flows. -60, -50, 6,
45, 60, 70, 60, 45, 20. Discount rate at 10%. Please show work for
the internal rate of return calculation.

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.

Net Present Value Method, Internal Rate of Return Method, and
Analysis for a Service Company
The management of Advanced Alternative Power Inc. is considering
two capital investment projects. The estimated net cash flows from
each project are as follows:
Year
Wind
Turbines
Biofuel Equipment
1
$390,000
$700,000
2
390,000
700,000
3
390,000
700,000
4
390,000
700,000
The wind turbines require an investment of $1,113,450, while the
biofuel equipment requires an investment of $1,812,300. No residual
value is expected from either...

Class what are Net Present Value (NPV) and Internal Rate of
Return (IRR) and how do they link to our discussion of cost/benefit
analysis?

Why isn’t accounting net income used in the net present value
and internal rate of return methods of making capital budgeting
decisions?

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