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. Projects Y and Z are mutually exclusive projects. Their cash flows and NPV profiles are shown as follows. NPV (Dollars) Year Project Y Project Z 800 -$1,500 -$1,500 1 $200 $900 600 Project Y 2 $400 $600 3 $600 $300 400 4 $1,000 $200 Project Z 200 If the weighted average cost of capital (WACC) for each project is 14%, do the NPV and IRR methods agree or conflict? -200 0 2 4 6 8 10 12 14 16 18 20 COST OF CAPITAL (Percent) O The methods agree. O The methods conflict. A key to resolving this conflict is the assumed reinvestment rate. The IRR calculation assumes that intermediate cash flows are reinvested at the and the NPV calculation implicitly 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. Projects Y and Z are mutually exclusive projects. Their cash flows and NPV profiles are shown as follows. NPV (Dollars) Year Project Y Project Z 800 -$1,500 -$1,500 1 $200 $900 600 Project Y 2 $400 $600 3 $600 $300 400 4 $1,000 $200 Project Z 200 If the weighted average cost of capital (WACC) for each project is 14%, do the NPV and IRR methods agree or conflict? -200 0 2 4 6 8 10 12 14 16 18 20 COST OF CAPITAL (Percent) O The methods agree. O The methods conflict. A key to resolving this conflict is the assumed reinvestment rate. The IRR calculation assumes that intermediate cash flows are reinvested at the and the NPV calculation implicitly 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.

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter10: The Basics Of Capital Budgeting: Evaluating Cash Flows

Section: Chapter Questions

Problem 1Q: Define each of the following terms: Capital budgeting; payback period; discounted payback...

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