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Unformatted text preview: greater than that hurdle rate, both should be accepted if they are independent. However, if they are mutually exclusive, franchise S would be selected, because it has the higher IRR. d. 4. Would the franchises' IRRs change if the cost of capital changed? Answer: IRRs are independent of the cost of capital. Therefore, neither IRR S nor IRR L would change if r changed. However, the acceptability of the franchises could change--L would be rejected if r were above 18.1%, and S would also be rejected if r were above 23.6%. e. 1. Draw NPV profiles for franchises L and S. At what discount rate do the profiles cross? Answer: the NPV profiles are plotted in the figure below. Note the following points: 1. The y-intercept is the project's NPV when r = 0% . This is $50 for L and $40 for S. 2. The x-intercept is the project's IRR . This is 18.1 percent for l and 23.6 percent for S....
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This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.
- Spring '08