Lecture 19 - Capital Budgeting - NPV and Other Criteria (II)

# Multiple irrs the scale problem for mutually

This preview shows page 1. Sign up to view the full content.

This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Scale Problem (for mutually exclusive projects) (f The Timing Problem (for mutually exclusive projects) BAFI 355 – Spring 2010 19-6 Problems with IRR: Are We Borrowing or Lending? We Borrowing or Lending? Analyze the IRR for these two “similar” projects Project 1 -100 IRR=? 0 Project 2 130 +100 IRR=? -130 0 1 1 You You can verify that the IRR for each project is 30%. IRR verify that the IRR for each project is 30% IRR “unadjusted” rule would say accept the project if the discount rate is below 30%. However, notice that the NPV of Project 2 is actually negative for a notice that the NPV of Project is actually negative for discount rate below 30%. Check Project 2’s NPV profile: \$40.00 NPV \$30.00 IRR \$20.00 \$10.00 Discount rate \$0.00 (\$10.00) 0 10 20 30 40...
View Full Document

## This note was uploaded on 05/28/2013 for the course BAFI 355 taught by Professor Mahnic during the Spring '09 term at Case Western.

Ask a homework question - tutors are online