Question

+ Project A + Project B NPV $5,000.00 $4,000.00 $3,000.00 $2,000.00 $1,000.00 $0.00 ($1.000.000% ($2,000.00) ($3,000.00) ($4,000.00) 10% 20% 30% 40% Discount rate

Refer to the graph of mutually exclusive projects shown above Kindly explain with reasoning the below

a. At an 8% cost of capital, which project has a higher NPV?

b. Where on the graph would there be a conflict between the NPV and IRR methods? In other words, under what conditions would the NPV method tell you that project B is better and the IRR method tell you that project A is better?

c. What does the slope of these NPV profile curves tell us ?

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Answer 1

­SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

W @ vor 1x 3 ENG = 04:32 21-03-2020 ... X - V X AAF fix AAG AAH A AL AAJ AAK AAL AAM AAN AAO AAP AAQ AAR AAS AAT A AAJ209 AAE 186 187 188 189 190 191 192 193 a AT 8% COST OF CAPITAL PROJECT B HAS HIGHER NPV IF WE SEE GRAPH, CROSS OVER RATE = 10% SO IF WACC < CROSS OVER RATE PROJECT B IS BETTER AS NPV IS HIGHER 194 195 AND ONCE WACC > CROSSOVER RATE PROJECT A IS BETTER AS NPV AND IRR BOTH GIVE SAME RESULT 196 197 198 199 SO WHEN WACC < CROSSOVER RATE, THERE WILL BE A CONFLICT BETWEEN NPV AND IRR WHEN WACC > CROSSOVER RATE, BOTH NPV AND IRR AGREE 0 1 SLOPE = DOWNWARD SLOPING SO AS RATE INCREASES, NPV DECREASES 202 203 204 205 206 207 PROJECT B HAS MORE STEEP CURVE THAN PROJECT A WHICH IMPLIES THAT AS RATE INCREASES, PROJECT B NPV DECREASES FASTER THAN PROJECT A AND SO THERE IS A CONFLICT BETWEEN NPV AND IRR TILL RATE REACHES TO CROSSOVER RATE AFTER THAT BOTH NPV AND IRR METHOS TALLY, GIVE SAME DECISION 208 209 ... HPR GMAM EAC MACRS RELEVANT MI-np-ir NPV BETA LEVERED REPLACEMENT BOND OPTION TO WAIT STEIN indiffEPS EBIT LEASE SLM GOLF ... Đ TIN