If an independent project with conventional, or normal, cash flows is being analyzed, the net present...
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If an independent project with conventional, or normal, cash flows is being analyzed, the net present value (NPV) and internal rate of return (IRR) methods agree. always sometimes always never Projects W and X are mutually exclusive projects. meir cash flows and NPV profiles are shown as follows. Year Project W Project X 0 -$1,500 1 $350 2 $500 3 4 - $1,000 $200 $350 $400 $600 $600 $750 If the weighted average cost of capital (WACC) for each project is 2%, do the NPV and IRR methods agree or conflict? The methods agree. O The methods conflict. NPV (Dollars) 800 600 400 200 0 -200 0 Project X Project W 2 4 6 8 10 12 14 16 18 20 COST OF CAPITAL (Percent) A key to resolving this conflict is the assumed reinvestment rate. The NPV calculation implicitly assumes that intermediate cash flows are reinvested at the internal rate return (IRR) , and the IRR calculation assumes that the rate at which cash flows can be reinvested is the As a result, when evaluating mutually exclusive projects, the is usually the better decision criterion. If an independent project with conventional, or normal, cash flows is being analyzed, the net present value (NPV) and internal rate of return (IRR) methods agree. always sometimes always never Projects W and X are mutually exclusive projects. meir cash flows and NPV profiles are shown as follows. Year Project W Project X 0 -$1,500 1 $350 2 $500 3 4 - $1,000 $200 $350 $400 $600 $600 $750 If the weighted average cost of capital (WACC) for each project is 2%, do the NPV and IRR methods agree or conflict? The methods agree. O The methods conflict. NPV (Dollars) 800 600 400 200 0 -200 0 Project X Project W 2 4 6 8 10 12 14 16 18 20 COST OF CAPITAL (Percent) A key to resolving this conflict is the assumed reinvestment rate. The NPV calculation implicitly assumes that intermediate cash flows are reinvested at the internal rate return (IRR) , and the IRR calculation assumes that the rate at which cash flows can be reinvested is the As a result, when evaluating mutually exclusive projects, the is usually the better decision criterion.
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Related Book For
Case Studies in Finance Managing for Corporate Value Creation
ISBN: 978-0077861711
7th edition
Authors: Robert F. Bruner, Kenneth Eades, Michael Schill
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