8 Using what you have learned in the lecture notes and having just analyzed each of the projects using the four key capital budgeting techniques, describe the reinvestment assumptions for each of the methods (4 pts) Hint, the reinvestment rate assumptions have to do with how (if) the cash flows are discounted during analysis NPV IRR Profitability Index (PI) Payback period How would a change in the required rate of return affect the projects calculated internal rate of return (IRR) Explain Would the accept reject decision change using the IRR analysis method Explain Think about changes that happen in a project once it has been accepted and moving forward Here are 3 potential scenarios For each, describe what you expect to happen to the project's expected NPV, and WHY that is your expectation As MBA students, just being able to calculate NPV isnt sufficient You should be able to consider what the effects of various market or project changes on the projects viability Your workforce voted in a new union, raising wages for most line workers There has been no change in your product pricing or other expenses revenue projections Once construction began on the project, a rare black footed ferret was found nearby Environmental groups demand that the project halt operations for 9 months while the ferrets are found and relocated Once the ferrets were moved, operations continued as originally planned, but with all cash flows shifted out by 9 months Due to a (lucky) miscalculation by the marketing folks, demand for your projects products has increased in the early years of the project, but that stole sales from future years The same total inflows were achieved, but the timing was more front loaded than anticipated Your firm is looking at two mutually exclusive projects Project X has an NPV of $550,000 and an IRR of 14 5 Project Y has an NPV of $650,000 and an IRR of 16 8 Your firm's required rate of return is 12 5 Which of these projects would you accept (could be either, both, or one particular project be specific) WHY is that your decision

The Answer is in the image, click to view ...

Answered step by step

Verified Expert Solution

Link Copied!

Question

1 Approved Answer

Posted on Oct 05, 2024

8. Using what you have learned in the lecture notes and having just analyzed each of the projects using the four key capital budgeting techniques,

Using what you have learned in the lecture notes and having just analyzed each of the projects using the four key capital budgeting techniques, describe the reinvestment assumptions for each of the methods. (4 pts) Hint, the reinvestment rate assumptions have to do with how (if) the cash flows are discounted during analysis.
1. NPV
2. IRR
3. Profitability Index (PI)
4. Payback period
How would a change in the required rate of return affect the projects calculated internal rate of return (IRR)? Explain. Would the accept/reject decision change using the IRR analysis method? Explain.

Think about changes that happen in a project once it has been accepted and moving forward. Here are 3 potential scenarios. For each, describe what you expect to happen to the project's expected NPV, and WHY that is your expectation.

As MBA students, just being able to calculate NPV isnt sufficient. You should be able to consider what the effects of various market or project changes on the projects viability.

Your workforce voted in a new union, raising wages for most line-workers. There has been no change in your product pricing or other expenses/revenue projections.

Once construction began on the project, a rare black-footed ferret was found nearby. Environmental groups demand that the project halt operations for 9 months while the ferrets are found and relocated. Once the ferrets were moved, operations continued as originally planned, but with all cash flows shifted out by 9 months.

Due to a (lucky) miscalculation by the marketing folks, demand for your projects products has increased in the early years of the project, but that "stole" sales from future years. The same total inflows were achieved, but the timing was more front-loaded than anticipated.

Your firm is looking at two mutually exclusive projects. Project X has an NPV of $550,000 and an IRR of 14.5%. Project Y has an NPV of $650,000 and an IRR of 16.8%. Your firm's required rate of return is 12.5%. Which of these projects would you accept (could be either, both, or one particular project -- be specific). WHY is that your decision?