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Topic: MULTIPLE METHODS OF VALUATION Type: ESSAYS
Chapter 05 - Net Present Value and Other Investment Rules 5-54 101. The Walker Landscaping Company can purchase a piece of equipment for $3,600. The asset has a two-year life, and will produce a cash flow of $600 in the first year and $4,200 in the second year. The interest rate is 15%. Calculate the project's payback assuming steady cash flows. Also calculate the project's IRR. Should the project be taken? Check your answer by computing the project's NPV. Payback = 1.714 yearsCalculated IRR = 16.67%. Accept the project. NPV = $97.54. Topic: MULTIPLE METHODS OF VALUATION Type: ESSAYS 102. The IRR rule is said to be a special case of the NPV rule. Explain why this is so and why it has some limitations NPV does not? At some K, NPV = $0; by definition, when NPV = 0, K = IRR.Problems occur with IRR due to conflicts with mutually exclusive projects, timing and size problems, multiple sign changes. NPV always the best choice Topic: INTERNAL RATE OF RETURN AND NET PRESENT VALUE Type: ESSAYS