Ch$8$

Critical Thinking and Concept Review

Q$8\mathrm{.}8$ Payback and Internal Rate of Return.$($Payback$)$ IRR$$

A project has perpetual cash flows of $C$ per period, a cost of I, and a required return of $R.$ What is the

relationship between the project's payback and its IRR? What implications does your answer have for

long$-$lived projects with relatively constant cash flows? $$ C$$ I$$

$r_0$ IRR $??$

Q$8\mathrm{.}11.$ Capital Budgeting in Not$-$for$-$Profit Entities. $$

Are the capital budgeting criteria we discussed applicable to not$-$for$-$profit corporations? How should such

entities make capital budgeting decisions? What about the U$.$S$.$ government? Should it evaluate spending

proposals using these techniques? $?$

$???$

Questions and Problems

Q$.1$ Calculating Payback.$$

What is the payback period for the following set of cash flows? $$

$?$

Q$.5$ Calculating IRR. $$ IRR

A firm evaluates all of its projects by applying the IRR rule. If the required return is $11$ percent, should the

firm accept the following project?

$$ IRR $11\%$

$?$ Consider the following two mutually exclusive projects: $$:

Whichever project you choose, if any, you require a return of $13$ percent on

your investment.

$(1)$ If you apply the payback criterion, which investment will you choose?

Why?

$(2)$ If you apply the NPV criterion, which investment will you choose? Why?

$(3)$ If you apply the IRR criterion, which investment will you choose? Why?

$(4)$ If you apply the profitability index criterion, which investment will you

choose? Why?

$(5)$ Based on your answers in parts $($a$)$ through $($d$),$ which project will you

finally choose? Why?

NPV and IRR.

Reece Company is presented with the following two mutually exclusive projects. The required return for both

projects is $15$ percent. $15\%$

$(1)$ What is the IRR for each project?

$(2)$ What is the NPV for each project?

$(3)$ Which, if either, of the projects should the company accept?