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Can you help me with theses 5 questions? 6. Understanding the NPV profile If an independent project with conventional, or normal, cash flows is being
Can you help me with theses 5 questions?
6. Understanding the NPV profile If an independent project with conventional, or normal, cash flows is being analyzed, the net present value (NPV) and internal rate of return (IRR) methods sometimes agree. always sometimes never Projects Y and Z are mutually exclusive projects. The cash flows and NPV profiles are shown as follows. NPV (Dollars) Year Project Y Project z 0 -$1,500 $1,500 1 $200 $900 2 $400 $600 3 $600 $300 4 $1,000 $200 Project Y Project 2 If the weighted average cost of capital (WACC) for each project is 6%, do the NPV and IRR methods agree or conflict? 0 2 4 6 8 The methods agree. The methods conflict. 10 12 14 16 18 20 COST OF CAPITAL (Percent) O A key to resolving this conflict is the assumed reinvestment rate. The NPV calculation implicitly assumes that intermediate cash flows are reinvested at the , and the IRR calculation assumes that the rate at which cash flows car internal rate of return (IRR) f return (IRR) modified internal rate of return (MIRR) required rate of return As a result, when evaluating mutually exclusiv e roy the better decision criterion. A key to resolving this conflict is the assumed reinvestment rate. The NPV calculation implicitly assumes that intermediate cash flows are reinvested at the , and the IRR calculation assumes that the rate at which cash flows can be reinvested is the internal rate of return (IRR) As a result, when evaluating mutually exclusive projects, the NPV method is usually the better decision criterionStep by Step Solution
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