Q2 ch 10

Problems with the IRR method Acme Oscillators is considering an investment project that has the following rather unusual cash flow pattern: a. Calculate the project's NPV at each of the following discount rates: 0%,5%,10%,20%,30%,40%,50%. b. What do the calculations tell you about this projecrs IRR? The IRR Nule telts manegers to invest if a project's IRR is greater than the cest of capial. If Acme Oscilators' cost of capial is 8%, should the company acoopt or reject this investment? c. Notice that this project's greatest NPVs come at very high discount rates. Can you provide an intuitive explanation for that pattern? d. If Acme Oscillators' cost of capital is 8%, should the company accept of reject this investment based on MIRR?? a. Caiculate the NPV at the following discount fates for this investment: 0%,5%,10%,20%,30%,40%,50%. The NPV at 0% is $ (Round to the nearest dollar.) The NPV at 5% is $ (Round to the nearest dollar.) The NPV at 10% is s. (Round to the nearest dollac.) The NPV at 20% is s . (Round to the nearest dollac.) The NPV at 30% is 4 . (Round to the nearest dolat.) The NPV at 40% is $ (Round to the nearest dollar.) The NPV at so\%s is s . (Round to the nearest dolac.) b. What do the calculations tell you about this projecrs IRR? (Select the best answer below.) A. The calculations tell you this project has no IRR. B. The calculations tell you this project has more than one IRR. C. The calculations tell you that this projoct's IRR is negative. D. The calculations tell you this projoct's IRR is greater than 50%. The IRR rule tells managers to invest if a projocrs IRR is greater than the cost of capital. If Acme Oscllators' cost of capital is 8% should the company accept or reject this investment? (Select the best answer below.) A. The IRR rule says that the frm should accept the investment it the IRR is less than the cost of capital. Howover. in cases with multiple IRRs, one IRR may be greater than the cost of capital. while another is lower. In such a situation, it is not dear whether to accept or reject the project. B. The IRR rule says that the frm should accept the investment if the IRR exceeds the cost of capital. However, in cases with multiple IRRs, one IRR may be greater than the cost of capital, while another is lower. In such a situation, in is not clear whether to accept or reject the project. c. The IRR rule says that the frm should accept the imvestment it the IRR exceeds the cost of capital. However, in cases with multiple IRRs, one IRR may be greater than the cost of capital, while another is lower. In such a sibuation, the project should always be accepted. D. The IRR nile says that the trm should acceph the investment if the IRR excoeds the NPV. However, in cases with multiple IRRs. one IRR may be greater than the cost of capital, while another is lower, In such a situation, the project should be acoepted if the NPV is greater than 0 . c. Notice that this project's greatest NPVs come at very high discount rates. Can you provide an intutive explanation for that patilern? (Select the best answer below.) A. The largest cash outtow ( $601,800,000) occurs in year 3 . Oher things ecual, a change in the discount rate will have a larger impact on present value when the outliow or inflow occurs further into the future. B. With a S0\% discount rate, for example, the present value of the $601,900,000 cuttlow is only $178.340,741(29.6% of the undiscountod outflow). In contrast, with a 5% discount rate, present value is $519,943,851 (86.4\% of the undiscounted cutflow). c. Nofice that this project's greatest NPVs come at very high discount rales. Can you provide an intulive explanation for that pattern? (Select the best answer below.) A. The largest cash outhow ($601,900,000) occurs in year 3 . Oeher things equal, a change in the discount rate wil have a larger impact on present value when the outlow or inflow occurs further into the future. B. With a 50% discount rate, for example, the present value of the $601,900,000 cutflow is only $178,340,741 (29.6\% of the undiscounted outlow). in contrast, with a 5% discount rate, presemt value is $519,943,851 (86.4\% of the undiscounted cutflow). C. There is no intubive explanation whon there are multiple IRRs. D. A and B provide an intuitive explanation. d. If Acme Oscilator' cost of capital is 8\%, the MiRR of the imestment is W. (Round to four decimal places.) The company should the invesiment because its MiRR is than the cost of capital. (Select from the drop-down menus.) b. What do the calculations tell you about thas propects irkR? The IRRR Nule teis managers to imvest if a project's IRR is greater than the cost of capial. If Acme Oscilators' cost of capial is 8\%, should the company acoept or reject this invnstment? c. Notice that this project's greatest NPVs come at very high discount rates. Can you provide an intuitive explanation for that pattern? Data table v. Ine caiculations The IRR rule tells mane (Click on the following icon 0 in order to copy its contents inte a spreadstieet.) 6. should the company accept or reject this investment? (Seloct the best answer below.) A. The IRR nile sd with muitipie IRRs, one IRR may be greater than the cos of capitat. 8. The IRR rule sa It multiple IRRe, one IRR may be greater than the cos of capital, C. The IRR rule sa th multipie IRRs, one IRR may be greater than the cost of capital, D. The IRR rule sa: e IRRs, one IRR may be greater than the cost of capital, while c. No6ce that this projetern? (Select the best answer below.) Problems with the IRR method Acme Oscillators is considering an investment project that has the following rather unusual cash flow pattern: a. Calculate the project's NPV at each of the following discount rates: 0%,5%,10%,20%,30%,40%,50%. b. What do the calculations tell you about this projecrs IRR? The IRR Nule telts manegers to invest if a project's IRR is greater than the cest of capial. If Acme Oscilators' cost of capial is 8%, should the company acoopt or reject this investment? c. Notice that this project's greatest NPVs come at very high discount rates. Can you provide an intuitive explanation for that pattern? d. If Acme Oscillators' cost of capital is 8%, should the company accept of reject this investment based on MIRR?? a. Caiculate the NPV at the following discount fates for this investment: 0%,5%,10%,20%,30%,40%,50%. The NPV at 0% is $ (Round to the nearest dollar.) The NPV at 5% is $ (Round to the nearest dollar.) The NPV at 10% is s. (Round to the nearest dollac.) The NPV at 20% is s . (Round to the nearest dollac.) The NPV at 30% is 4 . (Round to the nearest dolat.) The NPV at 40% is $ (Round to the nearest dollar.) The NPV at so\%s is s . (Round to the nearest dolac.) b. What do the calculations tell you about this projecrs IRR? (Select the best answer below.) A. The calculations tell you this project has no IRR. B. The calculations tell you this project has more than one IRR. C. The calculations tell you that this projoct's IRR is negative. D. The calculations tell you this projoct's IRR is greater than 50%. The IRR rule tells managers to invest if a projocrs IRR is greater than the cost of capital. If Acme Oscllators' cost of capital is 8% should the company accept or reject this investment? (Select the best answer below.) A. The IRR rule says that the frm should accept the investment it the IRR is less than the cost of capital. Howover. in cases with multiple IRRs, one IRR may be greater than the cost of capital. while another is lower. In such a situation, it is not dear whether to accept or reject the project. B. The IRR rule says that the frm should accept the investment if the IRR exceeds the cost of capital. However, in cases with multiple IRRs, one IRR may be greater than the cost of capital, while another is lower. In such a situation, in is not clear whether to accept or reject the project. c. The IRR rule says that the frm should accept the imvestment it the IRR exceeds the cost of capital. However, in cases with multiple IRRs, one IRR may be greater than the cost of capital, while another is lower. In such a sibuation, the project should always be accepted. D. The IRR nile says that the trm should acceph the investment if the IRR excoeds the NPV. However, in cases with multiple IRRs. one IRR may be greater than the cost of capital, while another is lower, In such a situation, the project should be acoepted if the NPV is greater than 0 . c. Notice that this project's greatest NPVs come at very high discount rates. Can you provide an intutive explanation for that patilern? (Select the best answer below.) A. The largest cash outtow ( $601,800,000) occurs in year 3 . Oher things ecual, a change in the discount rate will have a larger impact on present value when the outliow or inflow occurs further into the future. B. With a S0\% discount rate, for example, the present value of the $601,900,000 cuttlow is only $178.340,741(29.6% of the undiscountod outflow). In contrast, with a 5% discount rate, present value is $519,943,851 (86.4\% of the undiscounted cutflow). c. Nofice that this project's greatest NPVs come at very high discount rales. Can you provide an intulive explanation for that pattern? (Select the best answer below.) A. The largest cash outhow ($601,900,000) occurs in year 3 . Oeher things equal, a change in the discount rate wil have a larger impact on present value when the outlow or inflow occurs further into the future. B. With a 50% discount rate, for example, the present value of the $601,900,000 cutflow is only $178,340,741 (29.6\% of the undiscounted outlow). in contrast, with a 5% discount rate, presemt value is $519,943,851 (86.4\% of the undiscounted cutflow). C. There is no intubive explanation whon there are multiple IRRs. D. A and B provide an intuitive explanation. d. If Acme Oscilator' cost of capital is 8\%, the MiRR of the imestment is W. (Round to four decimal places.) The company should the invesiment because its MiRR is than the cost of capital. (Select from the drop-down menus.) b. What do the calculations tell you about thas propects irkR? The IRRR Nule teis managers to imvest if a project's IRR is greater than the cost of capial. If Acme Oscilators' cost of capial is 8\%, should the company acoept or reject this invnstment? c. Notice that this project's greatest NPVs come at very high discount rates. Can you provide an intuitive explanation for that pattern? Data table v. Ine caiculations The IRR rule tells mane (Click on the following icon 0 in order to copy its contents inte a spreadstieet.) 6. should the company accept or reject this investment? (Seloct the best answer below.) A. The IRR nile sd with muitipie IRRs, one IRR may be greater than the cos of capitat. 8. The IRR rule sa It multiple IRRe, one IRR may be greater than the cos of capital, C. The IRR rule sa th multipie IRRs, one IRR may be greater than the cost of capital, D. The IRR rule sa: e IRRs, one IRR may be greater than the cost of capital, while c. No6ce that this projetern? (Select the best answer below.)