Describe the scale problem and the timing problem and explain the potential effects of these problems on the choice of mutually exclusive projects, using IRR versus NPV.
Answer to relevant QuestionsWhat important flaw do both the IRR and PI share? Explain. If the IRR for a given project exceeds a firm’s hurdle rate, does that mean that the project necessarily has a positive NPV? Explain. Can you articulate circumstances under which the cost of excess capacity is zero? Think about why the cost of excess capacity normally is not zero. Why is using the cost of equity to discount project cash flows inappropriate when a firm uses both debt and equity in its capital structure? Why might the discount rate vary as you move through a decision tree?
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