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30 Mar 2019

When two mutually exclusive projects are being compared, explain why the short-term
project might be ranked higher under the NPV criterion if the cost of 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?

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Jean Keeling
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1 Apr 2019

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Related questions

When two mutually exclusive projects are being compared, explain why the short-term project might be higher ranked under the NPV criterion if the cost of 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? Explain.

What types of projects require the least detailed and the most detailed analysis in the

capital budgeting process?

(10-4) When two mutually exclusive projects are being compared, explain why the short-term

project might be ranked higher under the NPV criterion if the cost of 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?

1) Explain why the NPV of a relatively long-term project, defined as one for which a high percentage of its cash flows are expected in the distant future, is more sensitive to changes in the cost of capital than is the NPV of a short-term project.

b) When two mutually exclusive projects are being compared, explain why the short term project might be ranked higher under the NPV criterion if the cost of 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?

c) Suppose a firm is considering two manually exclusive projects. One has a life of 6 years and the other a life of 10 years. Would the failure to employ some type of replacement chain analysis bias an NPV analysis against one of the projects? Expain

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