project’s IRR. ____ 4. If a project’s NPV exceeds its IRR‚ then the project should be accepted. ____ 5. Conflicts between two mutually exclusive projects‚ where the NPV method chooses one project but the IRR method chooses the other‚ should generally be resolved in favor of the project with the higher NPV. ____ 6. The NPV method’s assumption that cash inflows are reinvested at the cost of capital is more reasonable than the IRR’s assumption that cash flows are reinvested at the IRR. This is an
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Course Materials: Case Studies in Finance: Managing for Corporate Value Creation‚ 7/e Robert F. Bruner‚ Kenneth M. Eades‚ Michael J. Schill‚ Darden School of Business‚ University of Virginia ISBN: 007786171x Copyright year: 2014 Course Overview: This course stresses the application of finance theory and methods to real business situations. Students will study problems of financial planning‚ capital structure‚ cost of capital‚ capital investment decisions‚ and corporate acquisitions
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its IRR‚ then the project should be accepted. a. True b. False ANSWER: False 5. Conflicts between two mutually exclusive projects occasionally occur‚ where the NPV method ranks one project higher but the IRR method puts the other one first. In theory‚ such conflicts should be resolved in favor of the project with the higher NPV. a. True b. False ANSWER: True 6. Conflicts between two mutually exclusive projects occasionally occur‚ where the NPV method ranks one project higher but the IRR method
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Solutions to Problems Note to instructor: In most problems involving the IRR calculation‚ a financial calculator has been used. P9-1. LG 1: Payback period Basic a. $42‚000 ÷ $7‚000 = 6 years b. The company should accept the project‚ since 6 < 8. P9-2. LG 1: Payback comparisons Intermediate a. Machine 1: $14‚000 ÷ $3‚000 = 4 years‚ 8 months Machine 2: $21‚000 ÷ $4‚000 = 5 years‚ 3 months b. Only Machine 1 has a payback faster than 5 years and is acceptable. c. The firm will accept the first
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“CAPITAL BUDGETING INAIR-INDIA” PROJECT REPORT SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD OF THE DEGREE OF MASTER OF MANAGEMENT STUDIES. MUMBAI UNIVERSITY SUBMITTED BY: - Mr. VISHAL D. JADHAV M.M.S 09-11 (Finance) SUBMITTED TO: - AIR- INDIA LTD. UNDER THE GUIDANCE: - Mr. SHOBHAN A. TALAVDEKAR DECLARATION I HEREBY DECLARE THAT I HAVE COMPLETED THIS PROJECT ON “CAPITAL BUDGETING” IN THE ACADEMIC YEAR 2010-2011. THIS INFORMATION IS TRUE AND ORIGINAL TO
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future Should we build this plant? All rights reserved - Christopher B. Alt 2 Key Steps in Capital Budgeting Estimate CFs (inflows & outflows) Assess riskiness of CFs Determine the appropriate cost of capital Find NPV and/or IRR Accept if NPV > 0 and/or IRR > WACC All rights reserved - Christopher B. Alt 3 Independent vs. Mutually Exclusive Projects Independent projects: if the cash flows of one are unaffected by the acceptance of the other Mutually exclusive projects: if the
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INTRODUCTION TO CAPITAL BUDGETING Overview 159 7.1 The NPV Rule for Judging Investments and Projects 159 7.2 The IRR Rule for Judging Investments 161 7.3 NPV or IRR‚ Which to Use? 162 7.4 The “Yes–No” Criterion: When Do IRR and NPV Give the Same Answer? 163 7.5 Do NPV and IRR Produce the Same Project Rankings? 164 7.6 Capital Budgeting Principle: Ignore Sunk Costs and Consider Only Marginal Cash Flows 168 7.7 Capital Budgeting Principle: Don’t Forget the Effects of Taxes—Sally and Dave’s
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to the share price or share value. The Internal Rate of Return of these entire projects are below the prototype store IRR which is a benchmark project. The IRR is an alternative to NPV however if the NPV is positive and the IRR is not what is desired‚ the NPV may supersede in making an investment decision. The IRR is what is expected based on internal factors. Projects with a low IRR may be funded through debt
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BenefitCost/Profitability Index Ratio IRR Capital Budget Techniques Accounting Rate of Return Non Discounted Payback Period Internal Rate of Return The rate at which the net present value of cash flows of a project is zero‚ I.e.‚ the rate at which the present value of cash inflows equals initial investment Project’s promised rate of return given initial investment and cash flows. Consistent with wealth maximization Accept a project if IRR ≥ Cost of Capital Question
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point of accepting this project. #5 Consider a project with the following cash flows: a. How many internal rates of return does this project have? b. Which of the following numbers is the project IRR: (i) -50%; (ii) -12%; (iii) +5%; (iv)+50%? As calculated in problem “a”‚ the project IRRs are (i) -50% &(iv)+50%. c. The
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