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Answers and Solutions:
11  2
f. Capital projects with nonnormal cash flows have a large cash outflow either
sometime during or at the end of their lives.
A common problem encountered when
evaluating projects with nonnormal cash flows is multiple IRRs.
A project has
normal cash flows if one or more cash outflows (costs) are followed by a series of
cash inflows.
g. The hurdle rate is the project cost of capital, or discount rate.
It is the rate used in
discounting future cash flows in the NPV method, and it is the rate that is compared
to the IRR.
The mathematics of the NPV method imply that project cash flows are
reinvested at the cost of capital while the IRR method assumes reinvestment at the
IRR.
Since project cash flows can be replaced by new external capital which costs r,
the proper reinvestment rate assumption is the cost of capital, and thus the best capital
budget decision rule is NPV.
h.
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 Spring '08
 Staff

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