onsider the cash flows on the following two timelines : Timeline One: -210 105 105 105 105 0 1 2 3 4 Timeline Two: -210 130 130 130 0 1 2 3 The appropriate rate of return for the risks in both business opportunities is r = 9%. The IRR for Timeline One is 34.90%, while the IRR for Timeline Two is higher at 38.71%. The NPV for Timeline One is $130.17, while the NPV for Timeline Two is lower at $119.07. Why is the Net Present Value lower on the second transaction compared to the first transaction, even though the IRR on the second transaction is higher? Multiple Choice Timeline Two has a lower NPV because it falls short of Market returns for the risks involved for a shorter period of time than does Timeline One Timeline Two has a lower NPV because it exceeds Market returns for the risks involved for a shorter period of time than does Timeline One Timeline Two has a lower NPV because it has lower risks than Timeline One none of the choices is correct Timeline One has a higher NPV because its discounted returns are higher each year than those of Timeline Two

Financial And Managerial Accounting

15th Edition

ISBN:9781337902663

Author:WARREN, Carl S.

Publisher:WARREN, Carl S.

Chapter26: Capital Investment Analysis

Section: Chapter Questions

Problem 2MAD: Assume San Lucas Corporation in MAD 26-1 assigns the following probabilities to the estimated annual...

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Consider the cash flows on the following two timelines :

Timeline One: -210 105 105 105 105

0 1 2 3 4

Timeline Two: -210 130 130 130

0 1 2 3

The appropriate rate of return for the risks in both business opportunities is r = 9%.

The IRR for Timeline One is 34.90%, while the IRR for Timeline Two is higher at 38.71%.

The NPV for Timeline One is $130.17, while the NPV for Timeline Two is lower at $119.07.

Why is the Net Present Value lower on the second transaction compared to the first transaction, even though the IRR on the second transaction is higher?

Multiple Choice

Timeline Two has a lower NPV because it falls short of Market returns for the risks involved for a shorter period of time than does Timeline One
Timeline Two has a lower NPV because it exceeds Market returns for the risks involved for a shorter period of time than does Timeline One
Timeline Two has a lower NPV because it has lower risks than Timeline One
none of the choices is correct
Timeline One has a higher NPV because its discounted returns are higher each year than those of Timeline Two

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