You have just started your summer internship, and your boss asks you to review a recent analysis that was done to compare three alternative proposals to enhance the firm's manufacturing facility. You find that the prior analysis ranked the proposals according to their IRR, and recommended the highest IRR option, Proposal A You are concerned and decide to redo the analysis using NPV to determine whether this recommendation was appropriate. But while you are confident the IRRs were computed correctly, it seems that some of the underlying data regarding the cash flows that were estimated for each proposal was not included in the report. For Proposal B, you cannot find information regarding the total initial investment that was required in Year 0. And for Proposal C, you cannot find the data regarding additional salvage value that will be recovered in Year 3. Here is the information you have (in $ millions): Year 0 Year 1 Year 2 Proposal A IRR 60.0% 54.3% 53.6% -$100 $30 $0 $37 $153 $206 $0 Year 3 $88 $95 $204+? -$100 Suppose the appropriate cost of capital for each alternative is 10%. Using this information, determine the NPV of each proposal. Which project should the firm choose? Why is ranking the projects by their IRR not valid in this situation?
You have just started your summer internship, and your boss asks you to review a recent analysis that was done to compare three alternative proposals to enhance the firm's manufacturing facility. You find that the prior analysis ranked the proposals according to their IRR, and recommended the highest IRR option, Proposal A You are concerned and decide to redo the analysis using NPV to determine whether this recommendation was appropriate. But while you are confident the IRRs were computed correctly, it seems that some of the underlying data regarding the cash flows that were estimated for each proposal was not included in the report. For Proposal B, you cannot find information regarding the total initial investment that was required in Year 0. And for Proposal C, you cannot find the data regarding additional salvage value that will be recovered in Year 3. Here is the information you have (in $ millions): Year 0 Year 1 Year 2 Proposal A IRR 60.0% 54.3% 53.6% -$100 $30 $0 $37 $153 $206 $0 Year 3 $88 $95 $204+? -$100 Suppose the appropriate cost of capital for each alternative is 10%. Using this information, determine the NPV of each proposal. Which project should the firm choose? Why is ranking the projects by their IRR not valid in this situation?
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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Transcribed Image Text:You have just started your summer internship, and your boss asks you to review a recent analysis that was done to compare three alternative proposals to enhance
the firm's manufacturing facility. You find that the prior analysis ranked the proposals according to their IRR, and recommended the highest IRR option, Proposal A.
You are concerned and decide to redo the analysis using NPV to determine whether this recommendation was appropriate. But while you are confident the IRRS
were computed correctly, it seems that some of the underlying data regarding the cash flows that were estimated for each proposal was not included in the report.
For Proposal B, you cannot find information regarding the total initial investment that was required in Year 0. And for Proposal C, you cannot find the data regarding
additional salvage value that will be recovered in Year 3. Here is the information you have (in $ millions):
Proposal
Year 1
Year 2
с
IRR
60.0%
54.3%
53.6%
Year 0
- $100
$30
$0
$37
$153
$206
$0
Year 3
$88
$95
$204+?
-$100
Suppose the appropriate cost of capital for each alternative is 10%. Using this information, determine the NPV of each proposal. Which project should the
firm choose? Why is ranking the proiects by their IRR not valid in this situation?
min
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