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

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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...
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