Consider the following cash flows of two mutually exclusive projects for A-Z Motorcars. Assume the discount rate
Question:
Consider the following cash flows of two mutually exclusive projects for A-Z Motorcars. Assume the discount rate for both projects is 10 percent.
a. Based on the payback period, which project should be taken?
b. Based on the NPV, which project should be taken?
c. Based on the IRR, which project should be taken?
d. Based on the above analysis, is incremental IRR analysis necessary? If yes, please conduct the analysis.
Year AZM Mini-SUV AZF Full-SUV -$525,000 -$810,000 1 290,000 410,000 2 245,000 390,000 3 185,000 350,000
Step by Step Answer:
a The payback period is the time that it takes for the cumulative undiscounted cash inflows to equal the initial investment AZM MiniSUV Cumulative cas...View the full answer
Corporate Finance Core Principles And Applications
ISBN: 9781260571127
6th Edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Bradford Jordan
Related Video
The internal rate of return, or IRR, is a metric used to measure the profitability of an investment. It is the discount rate that makes the net present value of an investment equal to zero. To calculate the IRR, we need to know the investment\'s cash flows. These are the inflows and outflows of cash that will result from the investment. For example, an investment in a property might have cash outflows for the purchase price, closing costs, and any renovations, and cash inflows from rent and eventual sale of the property. The IRR is the discount rate at which the NPV of the investment is equal to zero. There are many ways to calculate IRR, from simple spreadsheet functions to more complex financial modeling software. It\'s worth noting that IRR can be a bit tricky when it comes to projects that don\'t have a consistent cash flow over time. These types of investments are known as \"irregular cash flow\" and the IRR might be misleading or not suitable to calculate. There are other metrics to evaluate these investments such as Modified Internal Rate of Return (MIRR) which is a variation of IRR and is used to get more accurate results.
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