# projects s and l are equally risky, mutually exclusive, and have normal cash flows. project s has an irr of 15%, while project l’s irr is 12%. the two projects have the same npv when the wacc is 7%. which of the following statements is correct?

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get projects s and l are equally risky, mutually exclusive, and have normal cash flows. project s has an irr of 15%, while project l’s irr is 12%. the two projects have the same npv when the wacc is 7%. which of the following statements is correct? from EN Bilgi.

## Projects S and L are equally risky, mutually exclusive, and have normal cash flows. Project S has an IRR of 15%, while Project L's IRR is 12%. The two projects have the same NPV when the WACC is 7%. Which of the following statements is CORRECT? A) If the

Answer to: Projects S and L are equally risky, mutually exclusive, and have normal cash flows. Project S has an IRR of 15%, while Project L's IRR...

Internal rate of return

## Projects S and L are equally risky, mutually exclusive, and have normal cash flows. Project S has...

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## Question:

Projects S and L are equally risky, mutually exclusive, and have normal cash flows. Project S has an IRR of 15%, while Project L's IRR is 12%. The two projects have the same NPV when the WACC is 7%. Which of the following statements is CORRECT?

A) If the WACC is 6%, Project S will have a higher NPV.

B) If the WACC is 13%, Project S will have a lower NPV.

C) If the WACC is 10%, both projects will have a negative NPV.

D) Project S's NPV is more sensitive to changes in WACC than Project L's.

E) If the WACC is 10%, both projects will have positive NPVs.

## Internal Rate Of Return (IRR):

The internal rate of return (IRR) is a common capital budgeting method to determine whether a new investment should be exercised by assessing its potential benefits in the future. In practice, this method will be usually combined with others such as net present value (NPV), payback period, etc.

## Answer and Explanation:

A) Incorrect. There is a lack of information regarding the initial investments, and project's maturity, which will contribute different impact to the net present value if the WACC changes. Hence, it is undecidable in this case.

B) Incorrect. Given a WACC of 13%, the NPV of project L will be negative as the WACC is greater than the IRR. In the meantime, the NPV of project S remains positive, which is greater than the NPV of project L.

C) Incorrect. Both projects should have a positive NPV since the WACC is still lower than the IRR.

D) Incorrect. It is undecidable in this case due to the same reasons explained in answer A.

E) Correct. A project will have a positive NPV whenever its WACC is lower than the IRR.

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Internal Rate of Return: Advantages & Disadvantages

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Chapter 9 / Lesson 5

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The internal rate of return is a method of measuring and comparing the profits made from different projects and/or investments. Learn more about the internal rate of return, or IRR, as well as some of the advantages and disadvantages of the IRR.

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A firm should never accept a project if its acceptance would lead to an increase in the firm's cost of capital (its WACC).

a. True b. False

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False

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Because "present value" refers to the value of cash flows that occur at different points in time, a series of present values of cash flows should not be summed to determine the value of a capital budgeting project.

a. True b. False

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False

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### Terms in this set (108)

A firm should never accept a project if its acceptance would lead to an increase in the firm's cost of capital (its WACC).

a. True b. False False

Because "present value" refers to the value of cash flows that occur at different points in time, a series of present values of cash flows should not be summed to determine the value of a capital budgeting project.

a. True b. False False

Assuming that their NPVs based on the firm's cost of capital are equal, the NPV of a project whose cash flows accrue relatively rapidly will be more sensitive to changes in the discount rate than the NPV of a project whose cash flows come in later in its life.

a. True b. False False

A basic rule in capital budgeting is that if a project's NPV exceeds its IRR, then the project should be accepted.

a. True b. False False

Conflicts between two mutually exclusive projects occasionally occur, where the NPV method ranks one project higher but the IRR method puts the other one first. In theory, such conflicts should be resolved in favor of the project with the higher NPV.

a. True b. False True

Conflicts between two mutually exclusive projects occasionally occur, where the NPV method ranks one project higher but the IRR method puts the other one first. In theory, such conflicts should be resolved in favor of the project with the higher IRR.

a. True b. False False

The internal rate of return is that discount rate that equates the present value of the cash outflows (or costs) with the present value of the cash inflows.

a. True b. False True

Other things held constant, an increase in the cost of capital will result in a decrease in a project's IRR.

a. True b. False False

Under certain conditions, a project may have more than one IRR. One such condition is when, in addition to the initial investment at time = 0, a negative cash flow (or cost) occurs at the end of the project's life.

a. True b. False True

The phenomenon called "multiple internal rates of return" arises when two or more mutually exclusive projects that have different lives are being compared.

a. True b. False False

The NPV method is based on the assumption that projects' cash flows are reinvested at the project's risk-adjusted cost of capital.

a. True b. False True

The IRR method is based on the assumption that projects' cash flows are reinvested at the project's risk-adjusted cost of capital.

a. True b. False False

The NPV method's assumption that cash inflows are reinvested at the cost of capital is generally more reasonable than the IRR's assumption that cash flows are reinvested at the IRR. This is an important reason why the NPV method is generally preferred over the IRR method.

a. True b. False True

For a project with one initial cash outflow followed by a series of positive cash inflows, the modified IRR (MIRR) method involves compounding the cash inflows out to the end of the project's life, summing those compounded cash flows to form a terminal value (TV), and then finding the discount rate that causes the PV of the TV to equal the project's cost.

a. True b. False True

Both the regular and the modified IRR (MIRR) methods have wide appeal to professors, but most business executives prefer the NPV method to either of the IRR methods.

a. True b. False False

When evaluating mutually exclusive projects, the modified IRR (MIRR) always leads to the same capital budgeting decisions as the NPV method, regardless of the relative lives or sizes of the projects being evaluated.

a. True b. False False

One advantage of the payback method for evaluating potential investments is that it provides information about a project's liquidity and risk.

a. True b. False True

When considering two mutually exclusive projects, the firm should always select the project whose internal rate of return is the highest, provided the projects have the same initial cost. This statement is true regardless of whether the projects can be repeated or not.

a. True b. False False

The primary reason that the NPV method is conceptually superior to the IRR method for evaluating mutually exclusive investments is that multiple IRRs may exist, and when that happens, we don't know which IRR is relevant.

a. True b. False False

The NPV and IRR methods, when used to evaluate two independent and equally risky projects, will lead to different accept/reject decisions and thus capital budgets if the projects' IRRs are greater than their costs of capital.

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