Question
Furthermore, the client has mentioned that they are reviewing two mutually exclusive projects, each costing $100 thousands. Your team has already analysed these projects and
Furthermore, the client has mentioned that they are reviewing two mutually exclusive projects, each costing $100 thousands. Your team has already analysed these projects and expected the following cash flows for each project:
Cash Flow | Project Alpha | Project Beta |
Year 0 | -100,000 | -100,000 |
Year 1 | 32,000 | 0 |
Year 2 | 32,000 | 0 |
Year 3 | 32,000 | 0 |
Year 4 | 32,000 | 0 |
Year 5 | 32,000 | 200,000 |
The clients required rate of return was 11%. The client was using payback method to decide which project to choose. However, you have explained that NPV or IRR methods might suit the client better.
- If the required rate of return changes, how does such change affect the projects internal rate of return? (2 marks)
- What are assumptions of reinvestments implicitly made by NPV and IRR? Which one is better? (3 marks)
- If there is a ranking conflict, what is the reason for that? (2 marks)
- Which project should client accept and why? (2 marks)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started