When confronting conflicts regarding investment decisions, if presented with __________ a manager should select the project with the higher NPV if cash inflows can be reinvested at cost of capital or select the project with the higher IRR if cash inflows can be reinvested at the IRR of the project. Question 13 options: differing time patterns of cash inflows insufficient capital differing costs none of the options
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You are considering two mutually exclusive, equally risky, projects. Both have IRRs that exceed the WACC. Which of the following statements is CORRECT? Assume that the projects have normal cash flows, with one outflow followed by a series of inflows. Answer If the two projects' NPV profiles do not cross, then there will be a sharp conflict as to which one should be selected. If the cost of capital is greater than the crossover rate, then the IRR and the NPV criteria will not result in a conflict between the projects. The same project will rank higher by both criteria. If the cost of capital is less than the crossover rate, then the IRR and the NPV criteria will not result in a conflict between the projects. The same project will rank higher by both criteria. For a conflict to exist between NPV and IRR, the initial investment cost of one project must exceed the cost of the other. For a conflict to exist between NPV and IRR, one project must have an increasing stream of cash flows over time while the other has a decreasing stream. If both sets of cash flows are increasing or decreasing, then it would be impossible for a conflict to exist, even if one project is larger than the other.
Madhur L.
The underlying cause of conflicts in ranking for projects by internal rate of return and net present value methods is a. the assumption made by the IRR method that intermediate cash flows are reinvested at the internal rate of return b. the reinvestment rate assumption regarding the intermediate cash flows. c. the assumption made by the NPV method that intermediate cash flows are reinvested at the cost of capital d. All of the above are correct
Breanna O.
Which of the following statements is correct? When evaluating mutually exclusive projects, the modified IRR (MIRR) always leads to the same capital budgeting decisions as the NPV method, regardless of the relative lives or sizes of the projects being evaluated. Other things held constant, an increase in the cost of capital will result in a decrease in a project's IRR. The phenomenon called "multiple internal rates of return" arises when two or more mutually exclusive projects that have different lives are being compared. The NPV and IRR methods, when used to evaluate two independent projects, will lead to the same accept/reject decisions regardless of the cost of capital rate. All of them are incorrect.
Adi S.
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