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
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
Related questions
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 |
Ā 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.Ā
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.
You are a financial analyst for the Waffle Company. The director of capital budgeting has asked you to analyze two proposed capital investments, Projects A and B. Ā Each project has a cost of $50,000, and the cost of capital for each is 10%.
The projectsā expected net cash flows are as follows:
|
Ā |
Expected Net Cash Flows |
|
|
Year |
Project A |
Project B |
|
0 |
($50,000) |
($50,000) |
|
1 |
25,000 |
15,000 |
|
2 |
20,000 |
15,000 |
|
3 |
10,000 |
15,000 |
|
4 |
5,000 |
15,000 |
|
5 |
5,000 |
15,000 |
Ā
- Calculate each projectās payback period, net present value (NPV), internal rate of return (IRR), modified internal rate of return (MIRR), and profitability index (PI).
