Chapter 7, Problem 21P

a)

Summary Introduction

To determine: The investment that has the highest IRR.

Introduction:

IRR helps to make capital-budget decisions. IRR relies on the cash inflows and outflows of the project, instead of the external data. The project should be accepted if the IRR of the project exceeds a hurdle rate.

b)

Summary Introduction

To determine: The investment that has highest NPV, if the cost of capital is 7%.

Introduction:

NPV helps to make capital-budget decisions. It would choose an alternative or an investment to increase the value of an enterprise. Using NPV, the net benefit of an organization can be calculated by subtracting present value of cash outflows from cash inflows.

c)

Summary Introduction

To determine: The value of cost of capital does picking the higher IRR give the right answer.

Introduction:

NPV helps to make capital-budget decisions. It would choose an alternative or an investment to increase the value of an enterprise. The net benefit of an organization can be calculated by subtracting present value of cash outflows from cash inflows by using NPV.