Answer Happy

A project's internal rate of return (IRR) is
the -Select-compound ratediscount raterisk-free rateCorrect 1
of Item 1 that forces the PV of its inflows to equal its cost.
The IRR is an estimate of the project's rate of return, and it is
comparable to the -Select-YTMcoupongainCorrect 2 of Item
1 on a bond. The equation for calculating the IRR is:
CFt is the expected cash flow in Period t and
cash outflows are treated as negative cash flows. There must be a
change in cash flow signs to calculate the IRR. The IRR equation is
simply the NPV equation solved for the particular discount rate
that causes NPV to equal -Select-IRRonezeroCorrect 3 of Item
1.
The IRR calculation assumes that cash flows are reinvested at
the -Select-IRRNPVWACCCorrect 4 of Item 1. If the IRR
is -Select-lessgreaterCorrect 5 of Item 1 than the
project's risk-adjusted cost of capital, then the project should be
accepted; however, if the IRR is less than the project's
risk-adjusted cost of capital, then the project should
be -Select-acceptedrejectedCorrect 6 of Item 1. Because of the
IRR reinvestment rate assumption, when -Select-mutually
exclusiveindependentCorrect 7 of Item 1 projects are evaluated
the IRR approach can lead to conflicting results from the NPV
method. Two basic conditions can lead to conflicts between NPV and
IRR: -Select-returntimingpreferenceCorrect 8 of Item
1 differences (earlier cash flows in one project vs. later
cash flows in the other project) and project size (the cost of one
project is larger than the other). When mutually exclusive projects
are considered, then the -Select-IRRNPVCorrect 9 of Item
1 method should be used to evaluate projects.
Quantitative Problem: Bellinger Industries
is considering two projects for inclusion in its capital budget,
and you have been asked to do the analysis. Both projects'
after-tax cash flows are shown on the time line below.
Depreciation, salvage values, net operating working capital
requirements, and tax effects are all included in these cash flows.
Both projects have 4-year lives, and they have risk characteristics
similar to the firm's average project. Bellinger's WACC is 11%.
What is Project A’s IRR? Do not round intermediate calculations.
Round your answer to two decimal places.
%
What is Project B's IRR? Do not round intermediate calculations.
Round your answer to two decimal places.
%
If the projects were independent, which project(s) would be
accepted according to the IRR method?
-Select-NeitherProject AProject BBoth projects A and BCorrect 1
of Item 3
If the projects were mutually exclusive, which project(s) would
be accepted according to the IRR method?
-Select-Neither Project AProject BBoth projects A and
BCorrect 2 of Item 3
Could there be a conflict with project acceptance between the
NPV and IRR approaches when projects are mutually exclusive?
-Select-YesNoCorrect 3 of Item 3
The reason is -Select-the NPV and IRR approaches use the
same reinvestment rate assumption and so both approaches reach the
same project acceptance when mutually exclusive projects are
considered.the NPV and IRR approaches use different reinvestment
rate assumptions and so there can be a conflict in project
acceptance when mutually exclusive projects are considered.Correct
4 of Item 3
Reinvestment at the -Select-IRRWACCCorrect 5 of Item
3 is the superior assumption, so when mutually exclusive
projects are evaluated the -Select-NPVIRRCorrect 6 of Item
3 approach should be used for the capital budgeting
decision.