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Unformatted text preview: xclusive projects. Another Example: Another Example: Mutually Exclusive Projects Period Project B 0 Project A ­500 1 325 325 2 325 200 IRR 19.43% 22.17% NPV 64.05 60.74 ­400 The required return for both projects is 10%. Which project should you accept and why? Conflicts Between NPV and IRR Conflicts Between NPV and IRR NPV directly measures the increase in value to the firm Whenever there is a conflict between NPV and another decision rule, you should always use NPV IRR is unreliable in the following situations Non­conventional cash flows Mutually exclusive projects Profitability Index Profitability Index Profitability Inde x = Value Cre ated NPV = R esource C onsume d Re sourc e Consumed Example 3: Profitability Index Example 3: Profitability Index with a Human Resource Constraint Problem: 8-32 AaronCo is considering several projects to undertake. All of the projects currently under consideration have a positive NPV, but AaronCo has a fixed capital budget of $300 million. The company does not believe they will be able to raise any additional funds. How should AaronCo...
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