You are choosing between two projects. The cash flows for the projects are given in the following table ($ million):ProjectYear 0Year 1Year 2Year 3Year 4- $51- $102$25$19$18$40$21$48$14$59AВa. What are the IRRS of the two projects?b. If your discount rate is 5.3%, what are the NPVS of the two projects?c. Why do IRR and NPV rank the two projects differently?a. What are the IRRS of the two projects?The IRR for project A is %. (Round to one decimal place.)The IRR for project B is%. (Round to one decimal place.)b. If your discount rate is 5.3%, what are the NPVS of the two projects?If your discount rate is 5.3%, the NPV for project A is $million. (Round to two decimal places.)If your discount rate is 5.3%, the NPV for project B is $million. (Round to two decimal places.)c. Why do IRR and NPV rank the two projects differently? (Select from the drop-down menus.)NPV and IRR rank the two projects differently because they are measuring different things.is measuring value creation, whileis measuring return on investment. Because returns do not scale with different levels of investment, thetwo measures may give different rankings when the initial investments are different.NPVIRR

Net Present Value (NPV) is the method of capital budgeting used for finding the profitability of…

Answered: b. If your discount rate is 5.3%, what…

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b. If your discount rate is 5.3%, what are the NPVS of the two projects?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Concept explainers

Present Value

Present value (PV) is defined as the current or present value of all future sums of cash flow or money at a specified rate of return. This rate of return is known as the discounted rate, which is essentially the interest rate, discounted over some time. The expected cash flows are discounted at a discount rate to compute the present value. The higher the discount rate, the higher the future value (FV), but the lower the present value.

Question

You are choosing between two projects. The cash flows for the projects are given in the following table ($ million):
Project
Year 0
Year 1
Year 2
Year 3
Year 4
- $51
- $102
$25
$19
$18
$40
$21
$48
$14
$59
A
В
a. What are the IRRS of the two projects?
b. If your discount rate is 5.3%, what are the NPVS of the two projects?
c. Why do IRR and NPV rank the two projects differently?
a. What are the IRRS of the two projects?
The IRR for project A is %. (Round to one decimal place.)
The IRR for project B is
%. (Round to one decimal place.)
b. If your discount rate is 5.3%, what are the NPVS of the two projects?
If your discount rate is 5.3%, the NPV for project A is $
million. (Round to two decimal places.)
If your discount rate is 5.3%, the NPV for project B is $
million. (Round to two decimal places.)
c. Why do IRR and NPV rank the two projects differently? (Select from the drop-down menus.)
NPV and IRR rank the two projects differently because they are measuring different things.
is measuring value creation, while
is measuring return on investment. Because returns do not scale with different levels of investment, the
two measures may give different rankings when the initial investments are different.
NPV
IRR

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Below is a graph of the NPVS of Projects L and S at different discount rates. Which of the statements below is incorrect? NPV 60 ($) 50 40 30 32 20 10 Crossover Point = 8.7% S 0 5 10 15 20 20 -10 IRRL = 18.1% IRRS = 23.6% Discount Rate (%) 23.6 If the discount rate is less than 8.7%, Project L will have a lower NPV than Project S. O Project L will have a negative NPV if the discount rate is higher than 18.1%. If the projects are independent and the discount rate is 15%, both projects would be acceptable. If the discount rate is 24%, the company should NOT undertake Project S. At the crossover point, both projects will have the same NPV.
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