Finc 705 - Chapter 7 Study Guide Questions And Correct Answers

Projects A and B require an initial investment of $48,000 and $98,000, respectively. The projects are mutually exclusive, and you know the smaller project has a positive NPV. Which one of these methods is probably the best method to use to determine which project to accept? {Ans: Incremental internal rate of return}You are considering a project with conventional cash flows. The IRR is 12.6 percent, NPV is -$198, and the payback period is 2.87 years. Which one of the following statements is correct given this information? {Ans: The required rate of return must be greater than 12.6 percent.}A project has an initial cash inflow of $40,800 and a cash outflow of $44,900 in Year 1. The discount rate is 10 percent. Should this project be accepted or rejected based on IRR? Why? {Ans: Rejected, because the IRR is greater than the discount rate. IRR = $40,800 + (-$44,900) / (1 + IRR) IRR = 10.05% NPV = $40,800 + (-$44,900) / 1.10 NPV = -$18.18 Because this is a financing-type project, the project should be rejected since the IRR of 10.05 percent is greater than the discount rate of 10 percent. This is verified by the negative