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

Multiple irrs the scale problem for mutually

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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...
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