9. What is the intuition behind the IRR rule? Under what
conditions will the IRR rule and the NPV rule give the same
accept/reject decision?
10. Explain what is meant by ‘mutually exclusive projects’ and why
it is generally a bad idea to use IRR to choose between mutually
exclusive projects?
11. Using an example of each, explain sunk costs and opportunity
costs. Which of these costs should be included in incremental cash
flows and which should be excluded?
12. What does the WACC measure? Under what assumptions can the WACC
be used to value of project?
13. Argue how having debt in capital structure might be a
mitigating factor for agency costs
14. How do taxes affect the choice of debt versus equity?
15. What is the pecking-order theory, and what facts does it seem
to explain better than the trade-off model does?
16. Why are both the agency model and the signalling model
consistent with the observation that share prices fall for
companies that decrease dividends?
9.
Internal rate of return (IRR) for an investment is the
percentage rate (% rate) earned on each dollar invested for each
period it is invested. IRR is also another term people use for
interest (for calculating internal project's return and not for
whole company) . Ultimately, IRR gives an investor the means to
compare alternative investments (individual) based on their
yield.
If all of the project’s negative cash flows precede its positive
cash flows, then IRR rule and NPV rule will give the same
(accept/reject) result.
Please do rate me and mention doubts, if any, in the comments section .
9. What is the intuition behind the IRR rule? Under what conditions will the IRR rule...
10. Explain what is meant by ‘mutually exclusive projects’ and why it is generally a bad idea to use IRR to choose between mutually exclusive projects?
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
IRR, MIRR, NVP a. Project M costs $45,000, its expected cash inflows are $8,000 per year for 8 years, and its WACC is 9%. What is the project's MIRR? Do not round intermediate calculations. Round your answer to two decimal places.___% b. A company is analyzing two mutually exclusive projects, S and L, with the following cash flows: 0 1 2 3 4 Project S -$1,000 $883.36 $250 $5 $15 Project L -$1,000 $5 $240 $380 $807.41 The company's WACC...
Case Study 3--Capital Budgeting (Comprehensive Spreadsheet Problem 11-23, page 408) Your division is considering two projects. Its WACC is 10%, and the projects' after-tax cash flows (in millions of dollars) would be as follows: Expected Cash Flows Time Project A Project B 0 ($30) ($30) 1 $5 $20 2 $10 $10 3 $15 $8 4 $20 $6 a. Calculate the projects' NPVs, IRRs, MIRRs, regular paybacks, and discounted paybacks. WACC = 10% Use Excel's NPV function as explained in NPVA...
Client's Financial Questions: Provide a brief discussion of approximately 300 words detailing the risks inherent in stock returns in a portfolio of shares using the concepts of standard deviation and diversification as a basis for your discussion. .Under what conditions can a firm's weighted average cost of capital be used for assessing new projects? In the context of the net present value (NPV) model discuss: o The conditions that must be observed such that a project that has a positive...
Under what circumstances would it be appropriate for a firm to use different costs of capital for its different operating divisions? If the overall firm WACC were used as a hurdle rate for all divisions, would the riskier divisions or the more conservative divisions tend to get most of the investment projects? Why? Make sure to explain your answers.
Question 1. Issues in Capital Budgeting (30 marks-45 minutes) a. "Both the NPV and the IRR rules will always lead to the same decision being made irrespective of whether you are evaluating a capital investment project in isolation or two mutually exclusive projects." Critically discuss this statement. (5 marks) b. Your company is considering whether to invest in a new machine that costs R6m but will save the company R2.5m per year for the three years of its expected life....
For mutually exclusive projects, explain why picking one project over another because it has a larger IRR can lead to mistakes. QUESTION 2 ABC Enterprises is deciding whether to expand its production facilities. Although long-term cash flows are difficult to estimate, management has projected the following cash flows for the first two years (in millions of dollars: Items Year 1 Revenues 112 Costs of Good soles and operating expenses 47.7 Depreciation 25.9 Increase in net working capital 3. 1 7...
Lindsey was recently hired by Swift Ltd. as a junior budget analyst. She is working for the Venture Capital Division and has been given for capital budgeting projects to evaluate. She must give her analysis and recommendation to the capital budgeting committee. Lindsey has a B.S. in accounting from CWU (2007) and passed the CPA exam (2008). She has been in public accounting for 2 years. During that time she earned an MBA from Seattle U. She would like to...
Ronald was recently hired by Highland Equipment Inc. as a junior budget analyst. He is working for the Venture Capital Division and has been given for capital budgeting projects to evaluate. He must give his analysis and recommendation to the capital budgeting committee. Ronald has a B.S. in accounting from (2011) and passed the CPA exam (2017). He has been in public accounting for several years. During that time he earned an MBA from Seattle U. He would like to...