Discussion (No outside sources required)

A. Describe the reinvestment assumptions for each of the methods. (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

B. How would a change in the required rate of return affect the project’s calculated internal rate of return (IRR)? Explain. Would the accept/reject decision change using the IRR analysis method? Explain.

C. 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 a project's expected NPV, and WHY that is your expectation.

(Just being able to calculate NPV isn’t sufficient. You should be able to consider what the effects of various market or project changes on the project’s viability.)

LOOK AT EACH SITUATION INDIVIDUALLY AND ASSUME THAT THERE ARE NO OTHER CHANGES FOR THE FIRM.

(i) Two years ago, when the original cash flow projections were prepared for one of your company’s projects it was assumed that at the project’s end (another 6 years from now), the heavy equipment would be sold for $4mm to a competitor. Due to much heavier wear on the equipment, it is now assumed that the equipment will be worth less than $1mm at the project’s end.

(II) Newly available technology has reduced operating costs for a project that is in year 2 of a project which still has 8 years of viable life. No other changes in the project have occurred.

(III) Labor shortages and supply delays have hit your company across most sectors, including a new hotel that is under construction. Instead of the hotel opening in September of 2023, it is now anticipated that the hotel won’t be completed until mid-2025. These changes are anticipated to both increase construction costs as well as delay projected revenues on the project. Note: be sure to discuss each of these issues and whether they will offset or multiply the effect on NPV.

D. Your firm is looking at two mutually exclusive projects. Project X has an NPV of $750,000 and an IRR of 14.3%. Project Y has an NPV of $650,000 and an IRR of 18.8%. Your firm's required rate of return is 12.5%. Which of these mutually exclusive projects would you accept (either, both, or one particular project -- be specific, it matters). WHY is that your decision?