The Basics of Capital Budgeting:

The IRR calculation assumes that cash flows are reinvested at the ___________-(Select- IRR NPV WACC). If the IRR is _________-(Select- less or greater) than the project's risk-adjusted cost of capital, then the project should be accepted; however, if the IRR is less than the project's risk-adjusted cost of capital, then the project should be________( -Select-accepted or rejected). Because of the IRR reinvestment rate assumption, when ______(-Select-mutually exclusive independent) projects are evaluated the IRR approach can lead to conflicting results from the NPV method. Two basic conditions can lead to conflicts between NPV and IRR: _____(-Select-return timing preference) differences (earlier cash flows in one project vs. later cash flows in the other project) and project size (the cost of one project is larger than the other). When mutually exclusive projects are considered, then the _______(-Select-IRR NPV either) method should be used to evaluate projects. Quantitative Problem: Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects' after-tax cash flows are shown on the time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4-year lives, and they have risk characteristics similar to the firm's average project. Bellinger's WACC is 10%.

	0		1		2		3		4
Project A	-1,100		600		380		270		340
Project B	-1,100		200		315		420		790

What is Project As IRR? Do not round intermediate calculations. Round your answer to two decimal places. %

What is Project B's IRR? Do not round intermediate calculations. Round your answer to two decimal places. %

If the projects were independent, which project(s) would be accepted according to the IRR method? -Select-Neither

Project A

Project B

Both Projects A and B If the projects were mutually exclusive, which project(s) would be accepted according to the IRR method? -Select-Neither

Project A

Project B

Both Projects A and B Could there be a conflict with project acceptance between the NPV and IRR approaches when projects are mutually exclusive? -Select-Yes or No The reason is -Select-the NPV and IRR approaches use the same reinvestment rate assumption so both approaches reach the same project acceptance when mutually projects are considered the _____(NPV and IRR) approaches use different reinvestment rate assumptions so there can be a conflict in project acceptance when mutually exclusive projects are considered. Reinvestment at the______ (-Select-IRR or WACC) is the superior assumption, so when mutually exclusive projects are evaluated the _________(-Select-NPV or IRR) approach should be used for the capital budgeting decision.