Projects 25 20 15 10 5 1 2 3 4 x 5 capital rationing

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: oblems 1) Mutually exclusive projects of unequal 1) size (the size disparity problem) size size The NPV decision may not agree with The IRR or PI. IRR Solution: select the project with the largest NPV. NPV Size Disparity example Size Project A year cash flow year 0 (135,000) 1 60,000 2 60,000 3 60,000 required return = 12% IRR = 15.89% NPV = \$9,110 NPV \$9,110 PI = 1.07 Size Disparity example Size Project A year cash flow year 0 (135,000) 1 60,000 2 60,000 3 60,000 required return = 12% IRR = 15.89% NPV = \$9,110 PI = 1.07 Project B year cash flow year 0 (30,000) 1 15,000 2 15,000 3 15,000 required return = 12% IRR = 23.38% IRR 23.38% NPV = \$6,027 PI = 1.20 Size Disparity example Size Project A year cash flow year 0 (135,000) 1 60,000 2 60,000 3 60,000 required return = 12% IRR = 15.89% NPV = \$9,110 PI = 1.07 Project B year cash flow year 0 (30,000) 1 15,000 2 15,000 3 15,000 required return = 12% IRR = 23.38% NPV = \$6,027 PI = 1.20 Problems with Project Ranking Problems 2) The time disparity problem with mutually 2) time exclusive projects. excl...
View Full Document

This note was uploaded on 01/17/2014 for the course GEB 3375 taught by Professor Sweo during the Winter '08 term at University of Central Florida.

Ask a homework question - tutors are online