Question
In: Finance
The most common problem encountered when evaluating projects with unconventional cash flows is multiple IRRs. In...
The most common problem encountered when evaluating projects with unconventional cash flows is multiple IRRs. In such cases, which method should be used?
Group of answer choices
The profitability index method
The payback period
The IRR method
The NPV method
Solutions
Expert Solution
Ans is IRR Method
- An unconventional cash flow is a change in the direction of a company's cash flow over time from an inward cash flow to an outward cash flow or vice versa.
- An unconventional cash flow makes capital budgeting difficult because it requires more than one internal rate of return (IRR).
- Most projects have a conventional cash flow; one outflow of cash, which is the capital investment, and then multiple inflows of cash, which are the revenue
To tackle above problems IRR method is used in following manner
A single IRR can be calculated from this type of project, with the IRR compared to a company's hurdle rate to determine the economic attractiveness of the contemplated project. However, if a project is subject to another set of negative cash flows in the future, there will be two IRRs, which will cause decision uncertainty for management. For example, if the IRRs are 5% and 15%, and the hurdle rate is 10%, management will not have the confidence to go ahead with the investment.
jeff jeffy answered 1 year agoRelated Solutions
A company is evaluating two possible projects with the following cash flows. Suppose that the projects...
A company is evaluating two possible projects with the following
cash flows. Suppose that the projects are contingent. Which answer
describes the correct decision if the firm's required rate of
return is 15%?
Year
0
1
2
3
4
Project 1
-$50
$10
$15
$10
$20
Project 2
-$30
$20
$15
$30
$10
Question 16 options:
Accept both projects.
Accept project 1 and reject project 2.
Accept project 2 and reject project 1.
Reject both projects.
A company is evaluating two possible projects with the following cash flows. Suppose that the projects...
A company is evaluating two possible projects with the following
cash flows. Suppose that the projects are contingent. Which answer
describes the correct decision if the firm's required rate of
return is 12%?
Year
0
1
2
3
4
Project 1
-$50
$15
$15
$5
$5
Project 2
-$30
$20
$10
$10
$10
You are evaluating two mutually exclusive projects. The cash flows for each are:
You are evaluating two mutually exclusive
projects. The cash flows for each are:
Project
A Project
B
Year
0 ($60,000) ($85,000)
Year
1 $20,000 $22,000
Year
2 $35,000 $25,000
Year
3 $20,000 $30,000
Year
4 $25,000 $25,000
Year
5 $15,000
Year
6 $10,000
Year
7 $10,000
Year
8 $10,000
Assume that, if needed, each project is repeatable with no
change in cash flows. Your cost of capital is 13%.
Using the replacement chain approach, which project would you
chose to...
The manager of FIRN is evaluating two mutually exclusive projects. The costs and expected cash flows...
The manager of FIRN is evaluating two mutually exclusive
projects. The costs and expected cash flows are given in the
following table. The appropriate discount rate is 11.5% per
annum.
Years
Project X
Project Y
0
-$300,000
-$350,000
1
$150,000
$150,000
2
$150,000
$150,000
3
$250,000
$200,000
4
$80,000
$200,000
5
$80,000
$200,000
IRR
42.2%
39.3%
Calculate the crossover rate/incremental IRR, at which the NPV
profiles for Projects A and B intersect.
2.Which project should be accepted based on your...
The manager of FIRN is evaluating two mutually exclusive projects. The costs and expected cash flows...
The manager of FIRN is evaluating two mutually exclusive
projects. The costs and expected cash flows are given in the
following table. The appropriate discount rate is 11.5% per
annum.
Years
Project X
Project Y
0
-$300,000
-$350,000
1
$150,000
$150,000
2
$150,000
$150,000
3
$250,000
$200,000
4
$80,000
$200,000
5
$80,000
$200,000
IRR
42.2%
39.3%
1. Calculate the projects’ net present value (NPV). Identify
which project should be accepted under the rule of NPV. Explain
your
answer.
2. What...
Intro WH Smith Company is evaluating three projects: A, B, C, with cash flows as given...
Intro
WH Smith Company is evaluating three projects: A, B, C, with
cash flows as given in the table. Each project requires an initial
investment of $96,000 and has a required return of 6%.
Year
A
B
C
1
50,000
0
20,000
2
40,000
50,000
40,000
3
20,000
50,000
40,000
4
10,000
40,000
40,000
Attempt 3/10 for 8 pts.
Part 1
What is the payback period for project A (in years)?
Submit
Attempt 1/10 for 10 pts.
Part 2
What...
Brian Cliff is evaluating two mutually exclusive projects (expected cash flows shown below). The...
Brian Cliff is evaluating two mutually exclusive projects
(expected cash flows shown below). The firm's cost of
capital is 12.25
percent.
Year
Project
A
Project B
0
(600)
(600)
1
200
400
2
310
260
3
400
100
NPV?
_____
_____
IRR?
_____
_____
Calculate the NPVs and IRRs for Projects A and B.
Project A's NPV is $107.02, and Project B's...
Question 1: Project Evaluation (10 marks) Part A For unconventional cash flows, there will often be...
Question 1: Project Evaluation Part A For
unconventional cash flows, there will often be multiple IRRs. Under
those circumstances, we cannot use IRR for evaluation purposes. i)
Construct a hypothetical unconventional cash flow that yields two
possible IRRs. Present your cash flows in a table and plot its NPV
profile. (1.0 marks)
ii) Construct a hypothetical unconventional cash flow that yields
three possible IRRs. Present your cash flows in a table and plot
its NPV profile. Furthermore, assess which of...
Orchid Biotech Company is evaluating several different development projects for experimental drugs. Although the cash flows...
Orchid Biotech Company is evaluating several different
development projects for experimental drugs. Although the cash
flows are difficult to forecast, the company has come up with the
following estimates of the initial capital requirements and
NPVs
for the projects. Given a wide variety of staffing needs, the
company has also estimated the number of research scientists
required for each development project (all cost values are given
in millions of dollars).
Project Number
Initial Capital ($)
Number of Research Scientists
NPV...
Matterhorn Mountain Gear is evaluating two projects with the following cash flows: year project x project...
Matterhorn Mountain Gear is evaluating two projects with the
following cash flows:
year
project x
project y
0
-319,400
-299,050
1
146,100
137,300
2
163,600
154,500
3
128,700
120,250
What interest rate will make the NPV for the projects equal?
a)14.22%
b)18.31%
c)12.64%
d).26%
e)18.05%
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