The best project using the incremental IRR rule. 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.

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Chapter 7, Problem 26P

Summary Introduction

To determine: The best project using the incremental IRR rule.

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.

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You work for an outdoor play structure manufacturing company and are trying to decide between the following two projects: Year-End Cash Flows ($ thousands) Project 0 1 2 Playhouse (minor project) -30 19 18 Fort (major poject) -75 38 52 You can undertake only one project. If your cost of capital is 6%, which one should you choose? O Playhouse because the incremental IRR is 10.56% O Playhouse because the IRR of Fort is lower Playhouse because the NPV of Playhouse is higher O Fort because the incremental IRR is 10.56%

You are a project manager for your company and you are faced with five potential projects that you can invest in. Free cash flow projections and additional relevant data are given for each project in the table below. Assume that there are no cash flows after year 3. Assume that you can only take each project once and that you can only choose one project. Which project would you invest in? Select the best answer. Project Project A Project B Project C Project D Project E O I. Project A II. Project B III. Project C IV. Project D O V. Project E FCF Forecasts by Year (in $1,000) 0 2 1 500 (400) (400) (300) (250) (300) 75 60 75 135 115 175 3 650 210 190 200 Interest Rate (EAR) 8.0% 10.0% 10.0% 12.0% 12.0% IRR 25.00% 17.57% 15.92% 17.81% 19.96%

Assume you are the finance manager of Salalah Mineral Water Company, and the company is considering investing in one of the three projects. The life for the Projects Amal, Sara and Project Farahl is 5 years. Project Amal costs OMR. 17030, and Project Farah costs OMR.17030. The discount rate/cost of capital is 2.55%. Required: Use the following techniques to help company to decide which Machine is better and justify why? a) Payback period b) Discount payback period c) Net Present Value d) Present value index -Profitability index. Year Project Amal Project Fatima 1 7440 8300 2 8096 9609 3 5440 8300 4 9096 9609 9696 9508 LO

Answer 2

Question

Chapter 7, Problem 26P

Summary Introduction

To determine: The best project using the incremental IRR rule.

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.

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Answer 3

Question

Chapter 7, Problem 26P

Summary Introduction

To determine: The best project using the incremental IRR rule.

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.

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Answer 4

Question

Chapter 7, Problem 26P

Summary Introduction

To determine: The best project using the incremental IRR rule.

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.

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Answer 5

Chapter 7, Problem 26P

Summary Introduction

To determine: The best project using the incremental IRR rule.

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.

Answer 6

Chapter 7, Problem 26P

Summary Introduction

To determine: The best project using the incremental IRR rule.

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.

Answer 7

Chapter 7, Problem 26P

Summary Introduction

To determine: The best project using the incremental IRR rule.

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.

Answer 8

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Answer 11

Ch. 7.1 - Explain the NPV rule for stand-alone projects.Ch. 7.1 - What does the difference between the cost of...Ch. 7.2 - Prob. 1CC Ch. 7.2 - If the IRR rule and the NPV rule lead to different...Ch. 7.3 - Can the payback rule reject projects that have...Ch. 7.3 - Prob. 2CC Ch. 7.4 - For mutually exclusive projects, explain why...Ch. 7.4 - What is the incremental RR and what are its...Ch. 7.5 - Prob. 1CC Ch. 7.5 - Prob. 2CC

The best project using the incremental IRR rule. 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.

Solution Summary: The author explains how the incremental IRR rule helps to make capital-budget decisions. The cost of capital is given as 8%.

Concept explainers

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To determine: The best project using the incremental IRR rule.

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.

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Chapter 7 Solutions

The best project using the incremental IRR rule. 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.

Solution Summary: The author explains how the incremental IRR rule helps to make capital-budget decisions. The cost of capital is given as 8%.

Concept explainers

Videos

To determine: The best project using the incremental IRR rule. 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.

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Chapter 7 Solutions

To determine: The best project using the incremental IRR rule.

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.