1. What does the traditional IRR decision model measure? 2. Why can the internal rate of return...
Question:
1. What does the traditional IRR decision model measure?
2. Why can the internal rate of return method give an answer in conflict with the net present value method?
3. Assume that we are analyzing a positive net present value project. For this project, which measure would be a more conservative measure of the rate of the return – the internal rate of return or the modified internal rate of return?
4. What does it mean to say the investment is independent and not mutually exclusive?
5. You have two mutually exclusive projects with the following equivalent annuities Project A with an equivalent annuity of $25,000, and Project B with an equivalent annuity of $20,000. Which one is better and why?
6. If an asset can be replicated, how would you determine the optimal abandonment time (maximizing the NPV or maximizing the equivalent annuity)?
7. If the net present value method is generally considered the superior measure for choosing between projects, why do we use the equivalent annuity for mutually exclusive investments with unequal lives? Is this a new method or an extension of the net present value method?
8. There is a project that involves rebuilding a machine and having the machine last for five more years and an alternative project to buy a new machine which would last for ten years. A project like this is available at the end of either machine’s life – so we need to compare our alternatives using the equivalent annuity technique. The rebuild option with a five-year life will use a present value interest factor for five years to calculate the equivalent annuity. The new machine with a ten-year life will use a present value for ten years. Given these unequal lives – do you include the salvage value of the existing machine in the cash flows for the rebuild five-year option or include this salvage value in the cash flows for the new machine option?
9. What two weaknesses of traditional payback are remedied with the present value payback method?
10. Which is typically higher the regular Profitability Index or the Modified Profitability index for the same project?
Expert Answer:
1 Internal Rate of Return measures the profitability of potential investment in percentage terms 2 T... View the full answer
