What are some potential problems in using internal rate of return (IRR) for mutually exclusive projects?
What are some potential problems in using internal rate of return (IRR) for mutually exclusive projects?
Homework Answers
the potential problems in using IRR for mutually exclusive projects is :
- The reinvestment rate assumption : The IRR assumes that the cash flows are invested at the IRR which makes the IRR wrong at times as against the NPV , which assumes that the cash flows are reinvested at the Cost of capital and this is correct.
- The IRR fails to provide a clear picture as to which investment is the best which is mandatory in case of mutually exclusive projects as selection of one will lead to rejecting the other. The NPV method provides an exact value by which the value of firm will increase in case they accept the project but IRR can also determine which project to accept or not but not the value.
- The presence of non- normal cash flows can provide multiple IRR's which also makes selection of projects difficult on the basis of IRR calculations. Hence, it cannot be used to evaluate projects. In such a case modified IRR is used.
Add Answer to:
What are some potential problems in using internal rate of
return (IRR) for mutually exclusive projects?
Internal rate of return (IRR) can reliably be used to choose between mutually exclusive projects. O True False
Internal rate of return (IRR) can reliably be used to choose between mutually exclusive projects. O True False
IRR—Mutually exclusive projects Bell Manufacturing is attempting to choose the better of two mutually exclusive projects...
IRR—Mutually exclusive projects Bell Manufacturing is attempting to choose the better of two mutually exclusive projects for expanding the firm's warehouse capacity. The relevant cash flows for the projects are shown in the following table: . The firm's cost of capital is 12%. a. Calculate the IRR for each of the projects. Assess the acceptability of each project on the basis of the IRRs. b. Which project is preferred? 0 Data Table a. The internal rate of return (IRR) of...
IRR-Mutually exclusive projects Bell Manufacturing is attempting to choose the better of two mutually exclusive projects...
IRR-Mutually exclusive projects Bell Manufacturing is attempting to choose the better of two mutually exclusive projects for expanding the firm's warehouse capacity. The relevant cash flows for the projects are shown in the following table: B . The firm's cost of capital is 13%. a. Calculate the IRR for each of the projects. Assess the acceptability of each project on the basis of the IRRs. b. Which project is preferred? a. The internal rate of return (IRR) of project X...
The IRR-Mutually exclusive projects Bell Manufacturing is attempting to choose the better of two mutually exclusive...
The IRR-Mutually exclusive projects Bell Manufacturing is attempting to choose the better of two mutually exclusive projects for expanding the firm's warehouse capacity. The relevant cash flows for the projects are shown in the following table: firm's cost of capital is 15% a. Calculate the IRR for each of the projects. Assess the acceptability of each project on the basis of the IRRs. b. Which project is preferred? a. The internal rate of return (IRR) of project X is %...
Dropdown options first 2 blanks: (internal rate of return IRR, required rate of return, modified internal...
Dropdown options first 2 blanks: (internal rate of return IRR,
required rate of return, modified internal rate of return MIRR)
Dropdown options 3rd blank: (NPV method, IRR method)
If projects are mutually exclusive, only one project can be chosen. The internal rate of return (IRR) and the net present value (NPV) methods will not always choose the same project. If the crossover rate on the NPV profile is below the horizontal axis, the methods will agree. always Projects Y and...
2. Internal rate of return (IRR) The internal rate of return (IRR) refers to the compound...
2. 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 $850,000. Blue Llama Mining Company has been basing capital budgeting decisions on a project's NPV; however, its new CFO...
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...
Under what conditions can internal rate of return (IRR) disagree with net present value? Group of...
Under what conditions can internal rate of return (IRR) disagree with net present value? Group of answer choices Mutually exclusive projects that have significant differences in size of the initial investment. Independent projects that have significant differences in size of the initial investment. Any projects having significant differences in size of the initial investment. None of these are correct. PreviousNext
Which of the following statements is correct? The internal rate of return (IRR) does not allow...
Which of the following statements is correct? The internal rate of return (IRR) does not allow you to determine whether mutually exclusive projects are acceptable. The net present value (NPV) is the only capital budgeting technique that allows you to determine which independent projects are acceptable. The net present value (NPV) technique provides an indication of the dollar benefit (on a present value basis) to the firm's shareholders of purchasing a capital budgeting project. A project's internal rate of return...
NPV and IRR. Reece Company is presented with the following two mutually exclusive projects. The required return f...
NPV and IRR. Reece Company is presented with the following two mutually exclusive projects. The required return for both projects is 15 percent. Year Project M Project N -$150,000 -$372,000 68,600 159,300 193,200 154,800 2 76,800 71,300 110,400 &se40,500 What is the IRR for each project? a. What is the NPV for each project? b. Which, if either, of the projects should the company accept? C. O-23
Internal rate of return (IRR) can reliably be used to choose between mutually exclusive projects. O True False
IRR—Mutually exclusive projects Bell Manufacturing is attempting to choose the better of two mutually exclusive projects for expanding the firm's warehouse capacity. The relevant cash flows for the projects are shown in the following table: . The firm's cost of capital is 12%. a. Calculate the IRR for each of the projects. Assess the acceptability of each project on the basis of the IRRs. b. Which project is preferred? 0 Data Table a. The internal rate of return (IRR) of...
IRR-Mutually exclusive projects Bell Manufacturing is attempting to choose the better of two mutually exclusive projects for expanding the firm's warehouse capacity. The relevant cash flows for the projects are shown in the following table: B . The firm's cost of capital is 13%. a. Calculate the IRR for each of the projects. Assess the acceptability of each project on the basis of the IRRs. b. Which project is preferred? a. The internal rate of return (IRR) of project X...
The IRR-Mutually exclusive projects Bell Manufacturing is attempting to choose the better of two mutually exclusive projects for expanding the firm's warehouse capacity. The relevant cash flows for the projects are shown in the following table: firm's cost of capital is 15% a. Calculate the IRR for each of the projects. Assess the acceptability of each project on the basis of the IRRs. b. Which project is preferred? a. The internal rate of return (IRR) of project X is %...
Dropdown options first 2 blanks: (internal rate of return IRR,
required rate of return, modified internal rate of return MIRR)
Dropdown options 3rd blank: (NPV method, IRR method)
If projects are mutually exclusive, only one project can be chosen. The internal rate of return (IRR) and the net present value (NPV) methods will not always choose the same project. If the crossover rate on the NPV profile is below the horizontal axis, the methods will agree. always Projects Y and...
2. 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 $850,000. Blue Llama Mining Company has been basing capital budgeting decisions on a project's NPV; however, its new CFO...
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...
NPV and IRR. Reece Company is presented with the following two mutually exclusive projects. The required return for both projects is 15 percent. Year Project M Project N -$150,000 -$372,000 68,600 159,300 193,200 154,800 2 76,800 71,300 110,400 &se40,500 What is the IRR for each project? a. What is the NPV for each project? b. Which, if either, of the projects should the company accept? C. O-23
Most questions answered within 3 hours.
-
A z-score
communicates a raw score’s "relative standing"
under the normal curve in relation to:
asked 1 minute ago -
An object is vibrating on a spring with the following equation
of motion:
?=(30 ??)cos((2?)/(160)?)
a)...
asked 23 seconds ago -
Vulcan Flyovers offers scenic overflights of Mount St. Helens,
the volcano in Washington State that explosively...
asked 2 minutes ago -
If organizations do not adapt fast enough and move incrementally
from the twentieth-century model to the...
asked 3 minutes ago -
A helium balloon with 2.5L of gas has a gauge pressure of 10,000
Pa. The balloon...
asked 7 minutes ago -
What is responsible for Jupiter's enormous magnetic field?
asked 23 minutes ago -
At the end of the year, a company offered to buy 5,000 units of
a product...
asked 24 minutes ago -
Implement C++ program for each of the following.
Let D = [-48, -14, -8, 0, 1,...
asked 44 minutes ago -
Consider a labor market in which LD = 400 – 4W and LS = 250 +...
asked 58 minutes ago -
Let’s say you are teaching a typically-developing young child
how to eat with a spoon. Describe...
asked 42 minutes ago -
Ask Your Teacher A toy gun uses a spring to project a 5.6-g soft
rubber sphere...
asked 54 minutes ago -
*****DO NOT ANSWER THIS QUESTION IF YOU DON'T
KNOW*******
Question - PERSONAL DEVELOPMENT ESSAY and Detailed...
asked 1 hour ago