dgeting criteria 41 Lecture Problems 5 \u00dc I Scream Ice Cream is evaluating a

Dgeting criteria 41 lecture problems 5 ü i scream

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dgeting criteria - 41Lecture Problems 5ÜI Scream Ice Cream is evaluating a project that has an NPV of $3,000; would cost $72,000 today; is expected to produce annual cash flows that grow by 2.35 percent per year forever; and is expected to have the first annual cash flow be $4,932 in 1 year. What is the IRR of the project? What is the internal rate of return for a project that is expected to cost $8,700 today; produce a cash flow of $9,900 in 1 year; and have an NPV of $700? ÜWhat is the internal rate of return for a project that is expected to cost $8,700 today; produce a
dgeting criteria - 42 Capital Budgeting Criteria: IRR Ü Key strengths of IRR and IRR rule è Appealing because it is a rate è Recognizes the time value of money è Recognizes project risk è Decision rule is not based on managerial discretion, but on economic principles è For projects with conventional cash flows, rule is appropriate and always leads to acceptance of projects that create value and always leads to rejection of projects that destroy value Produces same results as NPV rule for these types of projects
dgeting criteria - 44 Capital Budgeting Criteria: IRR Ü Three important cases when IRR rule is not appropriate and should not be used è Positive expected cash flow or flows and then negative expected cash flow or flows è Expected cash flows that flip sign more than once For example, expected cash flows are negative then positive then negative è Expected cash flows that never flip sign All expected cash flows are positive or all expected cash flows are negative
dgeting criteria - 45 Capital Budgeting Criteria: IRR - Example Ü Question: which of the following projects are appropriate to evaluate with the IRR rule and which are not appropriate for the IRR rule? Project C0 C1 C2 C3 C4 A -100 40 40 40 40 B -100 0 0 0 300 C -100 0 0 0 40 D 100 0 0 0 -1 E -100 80 80 80 -10 F -100 10 10 10 10 G 40 40 40 40 40 H 40 40 40 40 -100
dgeting criteria - 46 Capital Budgeting Criteria: IRR - Example Ü Question: which of the following projects are appropriate to evaluate with the IRR rule and which are not appropriate for the IRR rule? è Appropriate – projects with conventional cash flows Magnitude of expected cash flows is irrelevant è Not appropriate – all other projects Project C0 C1 C2 C3 C4 A -100 40 40 40 40 B -100 0 0 0 300 C -100 0 0 0 40 D 100 0 0 0 -1 E -100 80 80 80 -10 F -100 10 10 10 10 G 40 40 40 40 40 H 40 40 40 40 -100
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