Question

Briefly answer in Excel the questions that follow. An answer of 1-3 sentences for each question should suffice.

1. You are considering two mutually exclusive projects. The NPV for project one is positive and higher than the NPV for project two, while the IRR for project two is higher than that for project one. Which project should the firm accept and why?

2. When does a project result in only one IRR? If a project has more than one IRR, how can we use Excel to find the multiple IRRs?

3. A diversified, low-risk firm is considering investing in a high-risk project in a new industry. Is it appropriate to use the firm’s WACC as the discount rate when evaluating this project? Why or why not?

4. Briefly explain the benefits of a portfolio.

Answer 1

Ans 1) Project with higher NPV will be selected because for project value add is more important higher the NPV better the project.

Ans 2) In case of more than one IRR one should use MIRR function in excel

Ans 3) No it is appropriate to use the WACC as the discount rate due to higher risk associated with the project thus one should use risk premium to evaluate the higher risk project in that way one can get the correct NPV so that there is no issue with the future prospect of the project. Higher risk lead to higher return but that also lead to higher value of WACC.

Ans 4) Portfolios are the combination of stocks thus one can mitigate the risk by creating the portfolio of stocks which are negatively correlated that lead to reduction is portfolio risk it also lead to higher return per unit of risk in comparision of individual stocks.