PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 5, Problem 11PS
The
- a. Explain to Mr. Clops why this is not the correct procedure.
- b. Show him how to adapt the IRR rule to choose the best project.
- c. Show him that this project also has the higher
NPV .
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Mr. Cyrus Clops, the president of Giant Enterprises, has to make a choice between two possible investments
Project
C0
C1
C2
C3
C4
IRR
A
-450
250
300
208
250
43%
B
-225
120
179
200
150
57%
Mr. Clops is tempted to take B, which has the higher IRR.
Show him how to adapt the IRR rule to choose the best project
Multiple Choice
WIn this case project B has a higher IRR than project A. However, project B is half the size of project A. Mr. Clops can compute the incremental IRR (IIRR). Mr. Clops should take project A when the discount rate is less thant the IIRR= 7%
WIn this case project B has a higher IRR than project A. However, project B is half the size of project A. Mr. Clops can compute the incremental IRR (IIRR). Mr. Clops should take project A when the discount rate is less thant the IIRR= 25.4%
WIn this case project B has a higher IRR than project A. However, project B is half the size of project A. Mr. Clops can compute the incremental IRR (IIRR). Mr. Clops…
Finance Question
Mr. Cyrus Clops, the president of Giant Enterprises, has to make a choice between two possible investments:
Cash Flows ($thousands)
Project
C0
C1
C2
IRR(%)
A
-400
+250
+300
23
B
-200
+140
+179
36
The opportunity cost of capital is 5%.
Mr. Clops is tempted to take B, which has the higher IRR.
Why should not Mr. Clops base his decision on the IRR?
Multiple Choice
When projects have different sizes (very different cash flows in year 0), the IRR may give the wrong solution.In this case project B has a higher IRR than project A. However, project B is half the size of project A.
The NPV gives the right choice. In this case the NPV of Project B is $120 > $90 the NPV of Project A
When projects have different sizes (very different cash flows in year 0), the IRR may give the wrong solution.In this case project B has a higher IRR than project A. However, project B is half the size of project A.
The NPV gives the right choice. In…
Chapter 5 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 5 - (IRR) Check the IRRs for project F in Section 5-3.Ch. 5 - (IRR) What is the IRR of a project with the...Ch. 5 - (XIRR) What is the IRR of a project with the...Ch. 5 - Payback a. What is the payback period on each of...Ch. 5 - Payback Consider the following projects: a. If the...Ch. 5 - Prob. 3PSCh. 5 - IRR Write down the equation defining a projects...Ch. 5 - Prob. 5PSCh. 5 - IRR Calculate the IRR (or IRRs) for the following...Ch. 5 - IRR rule You have the chance to participate in a...
Ch. 5 - IRR rule Consider a project with the following...Ch. 5 - IRR rule Consider projects Alpha and Beta: The...Ch. 5 - IRR rule Consider the following two mutually...Ch. 5 - IRR rule Mr. Cyrus Clops, the president of Giant...Ch. 5 - Prob. 12PSCh. 5 - Investment criteria Consider the following two...Ch. 5 - Profitability index Look again at projects D and E...Ch. 5 - Capital rationing Suppose you have the following...Ch. 5 - Prob. 17PSCh. 5 - Prob. 18PS
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