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2. Mutually exclusive projects – IRR cannot rank
mutually exclusive projects because it will not always
give the same answer as the NPV rule in these cases
3. Multiple rates of return – when the sign of the cashflow stream changes more than once, then there is
typically more than one IRR
The profitability index is sometimes used to rank
projects even when there is no soft or had capital
rationing, which leads users to favor small projects over
larger projects, which might have higher NPVs.
Profitability index criteria should only be used when
there is capital rationing. Chapter 11 Portfolio Return and Variance ( ( )) ( )) (
√ √ ( ( )) (
( )) ( )) ( ( ( )) Expected Return and Variance ()
( ( )) √ ( ( ))
√( ( )) (
( )) ( ( )) ( ( ))...
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- Summer '13