Mini Case:
11  35
e.
2.
Look at your NPV profile graph without referring to the actual NPVs and IRRs.
Which franchise or franchises should be accepted if they are independent?
Mutually exclusive?
Explain.
Are your answers correct at any cost of capital
less than 23.6 percent?
Answer:
The NPV profiles show that the IRR and NPV criteria lead to the same accept/reject
decision for any independent
project.
Consider franchise L.
It intersects the xaxis at
its IRR, 18.1 percent.
According to the IRR rule, L is acceptable if r is less than 18.1
percent.
Also, at any r less than 18.1 percent, L's NPV profile will be above the x
axis, so its NPV will be greater than $0.
Thus, for any independent project, NPV and
IRR lead to the same accept/reject decision
.
Now assume that L and S are mutually exclusive.
In this case, a conflict might
arise.
First, note that IRR
S
= 23.6% > 18.1% =
therefore, regardless of the size of r,
project S would be ranked higher by the IRR criterion.
However, the NPV profiles
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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
 Staff
 Cost Of Capital

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