Choices for the third blank: NPV Method, IRR Medthod i Safari File Edit View His

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Choices for the third blank: NPV Method, IRR Medthod

i Safari File Edit View History Bookmarks Window Help ng cengage.com MINDTAP Rebecca Davenport? Assignment 11 - The Basics of Capital Budgeting Due Today at 11:59 PM PDT Projects Y and Z are mutually exclusive projects. Their cash flows and NPV profiles are shown as follows. NPY (Dallars) Year Project Y Project Z 01,500 $1,500 $900 $600 $600 $300 $200 800 $200 600 Project Y $400 400 $1,000 Project 2 200 If the weighted average cost of capital (WACC) for each project is 696, do the NPV and IRR methods agree or conflict? 200 O The methods conflict. O The methods agree. 0 2 468 10 12 14 16 18 20 COST OF CAPITAL IPercentl A key to resolving this conflict is the assumed reinvestment rate. The IRR calculation assumes that intermediate cash flows are reinvested at the that the rate at which cash and the NPV calculation implicitly assumes required rate of return modified intemal rate of return (MIRR) internal rate of retun (IRR) As a result, when e is usually the better decision criterion Fash Player MAC 29,0,0, Aa

Explanation / Answer

1) internal rate of return (IRR)

the traditional internal rate of return (IRR) assumes the cash flows from a project are reinvested at the IRR.

2) NPV method

3)

NPV of project Y = -1,500 + 200 / ( 1 + 0.06)1 + 400 / ( 1 + 0.06)2 + 600 / ( 1 + 0.06)3 + 10,00 / ( 1 + 0.06)4  

NPV of project Y = $340.54

NPV of project Z = -1,500 + 900 / ( 1 + 0.06)1 + 600 / ( 1 + 0.06)2 + 300 / ( 1 + 0.06)3 + 200 / ( 1 + 0.06)4  

NPV of project Z = $293.36

IRR is the rate of return that makes NPV equal to 0

We use trial and error method to find IRR for both projects

Let's try R as 13.49

0 = -1,500 + 200 / ( 1 + R)1 + 400 / ( 1 + R)2 + 600 / ( 1 + R)3 + 1000 / ( 1 + R)4

0 = 0

Therfore IRR of project X is 13.49%

Let's try 17.07

0 = -1,500 + 900 / ( 1 + R)1 + 600 / ( 1 + R)2 + 300 / ( 1 + R)3 + 200 / ( 1 + R)4  

0 =0

Therefore IRR for project Z is 17.07%

The methods conflict

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