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Insert Draw Design Layout References Mailings >> le share locomments Pane 11-4 Multiple Internal Rates of Reture Why might a financial analyst use the NPV method for making project decisions instead of the IRR method 11-5 Reinvestment Rate Assumption Explain the reinvestment rate assumption in the context of a projeets cash flows over time 11-6 Medified Internal Rate of Return (MIRR) Calculate the MIRR of the cash flows of the peoject below, Assume both the finance rate and the reinvestment tale are 5% Cash Flow -100 20 80 90 Time Period 11-7 NPV Profiles-Part 1 When we create NPV profiles, what variable is on the y-axis and what variable is on the x-axis? 11-7 NPV Profiles-Part 2 In reference to this video, suppose the fim s WACC exceeds the IRR for both projects L and S f the projects are mutually exclasive, which project should the firm invest in? What if the projects are not mutually exchasive, then which projectis) should the firm invest in? (Hiet: If the WACC is greaner than both peojects IRR, then both projects would delivery negative NPV.) 11-7 NPV Profiles-Part 3 When we look at the NPV profiles for two projects, what exactly happens at the crossover point? If the WACC associated with the crossover poimt just so happens to equal the Eirms WACC, which project, assuming thcy are muhually esxclusive, sheuld the firm aclest: project L oe project S? Page 2013 630 words Focus 92% 10 2
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Answer to Q#11-4 (First question in the list IRR stands for Internal Rate of Return which is the discount rate that makes projects future cash equals to initial investment or in other words, IRR is the rate which makes NPV equals to zero. When compared, NPV is the superior evaluation technique tharn IRR as NPV considers both time value of money as well as projects returns in dollar value When there are more than one cash outflows during the life of the project, there can be a possiblity for more than one IRR to the same project. If there are more than one IRR, the evaluators cannot make any concrete decision about the project being evaluated with respect to what rate of return the project should yield in order to continue with the project or not. Only when the management is sure about the minimum rate of return required from the project being evaluated, financing options can be properly planned for the project. If not sure, firm may choose those financing options with higher cost of capital than the projects minimum required rate of return which in turn will have negative impact on firms solvency position badl

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