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If projects are mutually exclusive, only one project can be chosen. The internal rate of return (IRR) and the net present value (NPV) methods will not always choose the same project. If the crossover rate on the NPV profile is below the horizontal axis, the methods will _____________ agree.

Projects Y and Z are mutually exclusive projects. Their cash flows and NPV profiles are shown as follows

Year Project Y Project Z
0 -1,500 -1,500
1 200 900
2 400 600
3 600 300
4 1000 200

 If the weighted average cost of capital (WACC) for each project is 10%, do the NPV and IRR methods agree or conflict?

a. The methods conflict. 

b. The methods agree

A key to resolving this conflict is the assumed reinvestment rate. The NPV calculation implicitly assumes that intermediate cash flows are reinvested at the assumes that the rate at which cash flows can be reinvested is the, and the IRR calculation. As a result, when evaluating mutually exclusive projects, the________ is usually the better decision criterion.

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Vaishali Yadav
Vaishali YadavLv10
14 Jan 2021

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Related questions

Understanding the NPV Profile

1. If an independent project with conventional, or normal cash flows is being analyzed, the net present value (NPV) & internal rate of return (IRR) methods _______ agree.

A. Always

B. Never

C. Sometime

Projects W & X are mutually exclusive projects. Their cash flows & NPV profiles are shown as follows:

Year

Project W

Project X

0

$-1,500

$-1,500

1

$200

$900

2

$350

$600

3

$600

$300

4

$1000

$200

2. If the required rate of return for each project is 2%, do the NPV & IRR methods agree or conflict?

A. The methods agree

B. The methods conflict

A Key to resolving this conflict is the assumed reinvestment rate.

3. The NPV calculation implicitly assumes that intermediate cash flows are reinvested at the?

A. Modified rate of return (MIRR)

B. Required rate of return

C. Internal rate of return (IRR)

4. The IRR calculation assumes that the rate at which cash flows can be reinvested is the?

A. Modified rate of return (MIRR)

B. Required rate of return

C. Internal rate of return (IRR)

5. As a result, when evaluating mutually exclusives projects, the ________ is usually the better decision criterion.

A. IRR method

B. NPV method

Capital budgeting criteria

A firm with a 13% WACC is evaluating two projects for this year's capital budget. After-tax cash flows, including depreciation, are as follows:

0 1 2 3 4 5

Project A -$12,000 $4,000 $4,000 $4,000 $4,000 $4,000
Project B -$36,000 $11,200 $11,200 $11,200 $11,200 $11,200

Calculate NPV for each project. Round your answers to the nearest cent.
Project A $
Project B $

Calculate IRR for each project. Round your answers to two decimal places.
Project A %
Project B %

Calculate MIRR for each project. Round your answers to two decimal places.
Project A %
Project B %

Calculate payback for each project. Round your answers to two decimal places.
Project A years
Project B years

Calculate discounted payback for each project. Round your answers to two decimal places.
Project A years
Project B years

Assuming the projects are independent, which one or ones would you recommend?
-Select-
Only Project B would be accepted because NPV(B) > NPV(A).
Both projects would be accepted since both of their NPV's are positive.
Only Project A would be accepted because IRR(A) > IRR(B).
Both projects would be rejected since both of their NPV's are negative.
Only Project A would be accepted because NPV(A) > NPV(B).
Item 11

If the projects are mutually exclusive, which would you recommend?
-Select-
If the projects are mutually exclusive, the project with the highest positive IRR is chosen. Accept Project A.
If the projects are mutually exclusive, the project with the highest positive MIRR is chosen. Accept Project A.
If the projects are mutually exclusive, the project with the shortest Payback Period is chosen. Accept Project A.
If the projects are mutually exclusive, the project with the highest positive IRR is chosen. Accept Project B.
If the projects are mutually exclusive, the project with the highest positive NPV is chosen. Accept Project B.
Item 12

Notice that the projects have the same cash flow timing pattern. Why is there a conflict between NPV and IRR?
-Select-
The conflict between NPV and IRR is due to the relatively high discount rate.
The conflict between NPV and IRR is due to the fact that the cash flows are in the form of an annuity.
The conflict between NPV and IRR is due to the difference in the timing of the cash flows.
There is no conflict between NPV and IRR.
The conflict between NPV and IRR occurs due to the difference in the size of the projects.
Item 13

Capital budgeting criteria

A firm with a 14% WACC is evaluating two projects for this year's capital budget. After-tax cash flows, including depreciation, are as follows:

0 1 2 3 4 5
Project M -$6,000 $2,000 $2,000 $2,000 $2,000 $2,000
Project N -$18,000 $5,600 $5,600 $5,600 $5,600 $5,600

Calculate NPV for each project. Round your answers to the nearest cent. Do not round your intermediate calculations.
Project M $
Project N $

Calculate IRR for each project. Round your answers to two decimal places. Do not round your intermediate calculations.
Project M %
Project N %

Calculate MIRR for each project. Round your answers to two decimal places. Do not round your intermediate calculations.
Project M %
Project N %

Calculate payback for each project. Round your answers to two decimal places. Do not round your intermediate calculations.
Project M years
Project N years

Calculate discounted payback for each project. Round your answers to two decimal places. Do not round your intermediate calculations.
Project M years
Project N years

Assuming the projects are independent, which one(s) would you recommend?
-Select-Both projects would be accepted since both of their NPV's are positive.Only Project M would be accepted because IRR(M) > IRR(N).Both projects would be rejected since both of their NPV's are negative.Only Project M would be accepted because NPV(M) > NPV(N).Only Project N would be accepted because NPV(N) > NPV(M).Item 11

If the projects are mutually exclusive, which would you recommend?
-Select-If the projects are mutually exclusive, the project with the shortest Payback Period is chosen. Accept Project M.If the projects are mutually exclusive, the project with the highest positive IRR is chosen. Accept Project N.If the projects are mutually exclusive, the project with the highest positive NPV is chosen. Accept Project N.If the projects are mutually exclusive, the project with the highest positive IRR is chosen. Accept Project M.If the projects are mutually exclusive, the project with the highest positive MIRR is chosen. Accept Project M.Item 12

Notice that the projects have the same cash flow timing pattern. Why is there a conflict between NPV and IRR?
-Select-The conflict between NPV and IRR occurs due to the difference in the size of the projects.The conflict between NPV and IRR is due to the relatively high discount rate.The conflict between NPV and IRR is due to the fact that the cash flows are in the form of an annuity.The conflict between NPV and IRR is due to the difference in the timing of the cash flows.There is no conflict between NPV and IRR.

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