Question
In: Finance
1. Provide two conditions under which a set of projects might be characterized as mutually exclusive....
1. Provide two conditions under which a set of projects might be characterized as mutually exclusive.
2. Under what circumstances might the IRR and NPV approaches produce conflicting results?
Solutions
Expert Solution
1. Provide two conditions under which a set of projects might be characterized as mutually exclusive.
A set of projects are considered mutually exclusive when if one project is taken the other project cannot be taken.
- Resource constraint: There is no capital to invest in both the projects
- The two projects are of similar type. Taking one project makes the other project redundant.
2. IRR and NPV approaches produce conflicting results when the projects are mutually exclusive and the size of investments differ significantly in two projects.
Example: Project 1: Initial investment is $10,000. One year cash flow is $20,000
IRR = 100%
NPV at 10% discount rate = -10,000 + 20,000/1.1 = $8,181.8181818182
Project 2: Initial investment is $1,000,000. One year cash flow is $1,250,000
IRR = 25%
NPV at 10% discount rate = -1,000,000 + 1,250,000/1.1 = $136,363.636363636
If we go by IRR rule we would accept project 1 because its IRR (100%) is greater than the IRR of project 2 (25%)
But, the dollar amount we would make is only $8,181.8181818182 from project 1.
Therefore, whenever IRR rule and NPV rule conflicts, we should always go with NPV rule. NPV rule is superior to any other rule
jeff jeffy answered 1 year agoRelated Solutions
The Box Company was confronted with the two mutually exclusive investment projects, A and B, which...
The Box Company was confronted with the two mutually exclusive
investment projects, A and B, which have the following after-tax
cash flows:
Cash Flows, per Year ($)
Project
0
1
2
3
4
A
(12,000)
5,000
5,000
5,000
5,000
B
(12,000)
Nil
Nil
Nil
25,000
Based on these cash flows:
(a) Calculate each project’s NPV and IRR. (Assume that the
firm’s cost of capital after taxes is 10 percent.)
(b) Suggest to the management as to which project to...
A company is evaluating two mutually exclusive projects in which to invest. Project A needs an...
A company is evaluating two mutually exclusive projects in which
to invest. Project A needs an investment of $300,000 and will
deliver $160,000 in annual profits during its 8 years life. Project
B needs an investment of $400,000 and will deliver $210,000 in
annual profits during its 6 years life. Considering a Study Period
of 6 years, and that project A can be sold for $200,000 at the end
of the 6th year (because it will still have 2 years...
A firm is considering two mutually exclusive projects, A and B. The projects are different in...
A firm is considering two mutually exclusive projects, A and B.
The projects are different in that they have different returns
depending on general economic conditions. The firm forecasts that
return on the market, and the returns on each project, along with
their associated probabilities will be given by the following
table. You can assume a 5% risk free rate and a 6% market risk
premium. Assume the CAPM holds. Compare the expected returns to the
cost of capital for...
IRRlMutually exclusive projects Bell Manufacturing is attempting to choose the better of two mutually exclusive projects...
IRRlMutually
exclusive projects Bell
Manufacturing is attempting to choose the better of two mutually
exclusive projects for expanding the firm'swarehouse capacity. The
relevant cash flows for the projects are shown in the following
table:
Initial
investment $500,000 $320,000
Year
1 $130,000 $130,000
2 $120,000 $120,000
3 $130,000 $105,000
4 $200,000 $90,000
5 $250,000 $40,000
The firm's cost of capital is 17%.
a. Calculate the IRR for each
of the projects. Assess the acceptability of each project on the
basis of the IRRs.
b. Which project is
preferred?
(Mutually exclusive projects and NPV) You have been assigned the task of evaluating two mutually exclusive...
(Mutually exclusive projects and NPV) You have been assigned
the task of evaluating two mutually exclusive projects with the
following projected cash flows: If the appropriate discount rate
on these projects is 11 percent, which would be chosen and why?
What is the NPV of project A? $ nothing (Round to the nearest
cent.) What is the NPV of project B? $ (Round to the nearest
cent.) Which project would be chosen and why? (Select the best
choice.) A....
(Mutually exclusive projects and NPV) You have been assigned the task of evaluating two mutually exclusive...
(Mutually exclusive projects and NPV)
You have been assigned the task of evaluating two mutually
exclusive projects with the following projected cash flows:
YEAR
PROJECT A
CASH FLOW
PROJECT B
CASH FLOW
0
−$110,000
−$110,000
1
30,000
0
2
30,000
0
3
30,000
0
4
30,000
0
5
30,000
220,000
(Click
on the icon located on the top-right corner of the data table
above in order to copy its contents into a
spreadsheet.)
If the appropriate discount rate on these...
IRRlong dash—Mutually exclusive projects Bell Manufacturing is attempting to choose the better of two mutually exclusive...
IRRlong dash—Mutually
exclusive projects Bell Manufacturing is attempting to choose
the better of two mutually exclusive projects for expanding the
firm's warehouse capacity. The relevant cash flows for the projects
are shown in the following table:
LOADING...
. The firm's cost of capital is
1313 %.
a. Calculate the IRR for each of the projects. Assess the
acceptability of each project on the basis of the IRRs.
b. Which project is preferred?
Project X
Project Y
Initial investment
(CF 0CF0)...
(Mutually exclusive projects and NPV) You have been assigned the task of evaluating two mutually exclusive...
(Mutually exclusive projects and NPV) You have been assigned
the task of evaluating two mutually exclusive projects with the
following projected cash flows:
YEAR PROJECT A CASH FLOW PROJECT B CASH
FLOW
0 -105,000 -105,000
1 40,000 0
2 40,000 0
3 40,000 0
4 40,000 0
5 40,000 240,000
If the appropriate discount rate on these projects is 8
percent, which would be chosen and why? What is the NPV of
project A? What is the NPV of project...
The following 3 mutually exclusive projects are under consideration. Use Incremental IRR to determine which project...
The following 3 mutually exclusive projects are under
consideration. Use Incremental IRR to determine which project
should be undertaken if MARR = 18%.
year
Proj. A
Projc. B
Proj. C
0
$-500,000
$-350,000
$-700,000
1
$200,000
$100,000
$300,000
2
$200,000
$150,000
$300,000
3
$250,000
$200,000
$300,000
4
$250,000
$250,000
$300,000
Considering two mutually exclusive projects. The crossover rate between these two projects is ___ percent and...
Considering two mutually exclusive projects. The crossover rate
between these two projects is ___ percent and Project ___ should be
accepted if the required return is less than the crossover
rate.
Year
Project A
Project B
0
−$27,000
−$27,000
1
10,000
18,100
2
10,000
8,000
3
18,000
10,120
11.75%; A
11.75%; B
17.19%; B
18.64%; A
17.19%; A
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- 38. A contract with an illegal principal objective is typically which of the following? Answers: A....
- Explain how advances in technology can force a software subsystem to undergo change or run the...
- Discuss whether you agree or disagree on whether you think E-mails need to be managed and...
- b. Do any unions represent employees in Microsoft? Describe which unions are involved. c. Have there been...
- Look up and use each of these Linux commands. (Each command will have two parts) Summarize...
- What was Lincoln 10 percent plan and what problems did it present?
- A cantilever beam 4m long carries a uniform load of 3.5 kN/m over a portion 1.5m...
ADVERTISEMENT