P12-18 Capital rationing: IRR and NPV approaches Valley Corporation is attemptin
ID: 2651213 • Letter: P
Question
P12-18 Capital rationing: IRR and NPV approaches Valley Corporation is attempting to select the best of a group of independent projects competing for the firm's fixed capital budget of $4.5 million. The firm recognizes that any unused portion of this budget will earn less than its 15% cost of capital, thereby resulting in a present value of inflows that is less than the initial investment. The firm has summarized, in the following table, the key data to be used in selecting the best group of projects. a. Use the internal rate of return (IRR) approach to select the best group of projects. b. Use the net present value (NPV) approach to select the best group of projects. c. Compare, contrast, and discuss your findings in parts a and b. d. Which projects should the firm implement? Why?Explanation / Answer
As per IRR
the combination should be Project F and C as they are having highr IRR
Based on NPV
the combination should be project F and C due to higher NPV
Project F should be implemented at it is having higher NPV as well as IRR
A -5000000 17% 5400000 400000/50= .08 B -800000 18 1100000 300000/8 c -2000000 19 2300000 300000= D -1500000 16 1600000 100000 E -800000 22 900000 100000 F -2500000 23 300000 500000 G -1200000 20 1300000 100000Related Questions
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