Corporate Finance
3rd Edition
ISBN: 9780132992473
Author: Jonathan Berk, Peter DeMarzo
Publisher: Prentice Hall
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Chapter 22.5, Problem 1CC
Summary Introduction
To discuss: The reason why a higher
Introduction:
Investment refers to the act of purchasing the financial assets with the expectation of a rise in the value of the asset.
The variation between the present value of the
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Why NPV is generally preferred over IRR when choosing among competing or mutually exclusive projects. Why would managers continue to use IRR to choose among mutually exclusive projects?
When two mutually exclusive projects are being compared, explain why the short-term project might be ranged higher under the NVP criterion if the cost of the capital is high, whereas the long-term project might be deemed better if the cost of capital is low. Would changes in the cost of capital ever cause a change in the IRR ranking of two such projects? Why or why not?
When two mutually exclusive projects are being compared, explain whythe short-term project might be ranked higher under the NPV criterion ifthe cost of capital is high, whereas the long-term project might be deemedbetter if the cost of capital is low. Would changes in the cost of capital evercause a change in the IRR ranking of two such projects? Why or why not?
Chapter 22 Solutions
Corporate Finance
Ch. 22.1 - What is the difference between a real option and a...Ch. 22.1 - Why does a real option add value to an investment...Ch. 22.2 - Prob. 1CCCh. 22.2 - Prob. 2CCCh. 22.3 - What is the economic trade-off between investing...Ch. 22.3 - Prob. 2CCCh. 22.3 - Does an option to invest have the same beta as the...Ch. 22.4 - Why can a firm with no ongoing projects, and...Ch. 22.4 - Why is it sometimes optimal to invest in stages?Ch. 22.4 - How can an abandonment option add value to a...
Ch. 22.5 - Prob. 1CCCh. 22.5 - Prob. 2CCCh. 22.5 - Prob. 3CCCh. 22.6 - Prob. 1CCCh. 22.6 - Prob. 2CCCh. 22 - Your company is planning on opening an office in...Ch. 22 - You are trying to decide whether to make an...Ch. 22 - Prob. 3PCh. 22 - Prob. 4PCh. 22 - Prob. 5PCh. 22 - Prob. 6PCh. 22 - Prob. 7PCh. 22 - Prob. 8PCh. 22 - Prob. 9PCh. 22 - Prob. 11PCh. 22 - Prob. 12PCh. 22 - Prob. 13PCh. 22 - Prob. 15PCh. 22 - Prob. 18PCh. 22 - Prob. 19PCh. 22 - Prob. 20PCh. 22 - Prob. 21PCh. 22 - Prob. 22PCh. 22 - Prob. 23PCh. 22 - Prob. 24PCh. 22 - Prob. 25PCh. 22 - Prob. 26P
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Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Suppose that a firm must choose between two mutually exclusive projects, both of which have negative NPVs. Explain how a firm can legitimately choose between two such projects.arrow_forwardWhat is the NPV decision rule for discretionary mutually exclusive projects? A. Accept the project with the highest NPV, even if the NPV is negative. B. If there is sufficient capital, accept all positive-NPV projects. C. Accept the project with the highest IRR. D. Accept the project with the highest NPV, as long as the NPV is positivearrow_forwardWhat is the difference between a mutually exclusive project/investment and an independent project/investment? What is the best method or technique (NPV, IRR, Payback, Discounted Payback) to use in evaluating each type of project?arrow_forward
- Which of the following is a disadvantage of the internal rate of return criterion? Select one: a. It is not a true rate of return. b. It uses an arbitrary benchmark cutoff rate. c. It ignores time value of money, cash flows, and market values. d. It cannot be used to rank independent projects. e. It may lead to incorrect decisions when comparing mutually exclusive investments.arrow_forwardFinancially, what is the economic worth of outbidding thecompetitors for a project?arrow_forwardIf two mutually exclusive projects were being compared, would a high cost of capital favor the longer-term or the shorter-term project? Why? If the cost of capital declined, would that lead firms to invest more in longer-term projects or shorter-term projects? Would a decline (or an increase) in the WACC cause changes in the IRR ranking of mutually exclusive projects?Note: DONOT GIVE BREIF ANSWER USE SHORT CONCEPTUAL ANSWERarrow_forward
- If two mutually exclusive projects were being compared, would a high cost of capital favorthe longer-term or the shorter-term project? Why? If the cost of capital declined, would thatlead firms to invest more in longer-term projects or shorter-term projects? Would a decline(or an increase) in the WACC cause changes in the IRR ranking of mutually exclusive projects?Explain.arrow_forwardOver what range of discount rates would the company choose Project A? Project B? At what discount rate would the company be indifferent between these two projects? Explain.arrow_forwardConsider the mutually exclusive alternatives in the shown table. Which alternative would be chosen according to these decision criteria?Solve, a. Maximum benefit b. Minimum cost c. Maximum benefits minus costs d. Largest investment having an incremental B–C ratio larger than one e. Largest B–C ratio Which project should be chosen?arrow_forward
- What are the shortcomings of the internal rate of return criterion? How do you make an investment decision based on the IRR? How would the NPV of the same project look?arrow_forwardDescribe the Incremental-Investment Analysis for Comparing Mutually Exclusive Alternatives?arrow_forwardConsider IRR for a Nonsimple Project: Mixed Investment?arrow_forward
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