school but I forgot what were we doing when choosing the best project. Anyways,

Question

school but I forgot what were we doing when choosing the best project. Anyways, I guess I need more help" he sighs. The Decision Jack has requested some help in estimating the project's cash flows from his boss. The expected cash flows for the project is finalized as follows: Expected CFs Associated with the Project CF $10 million 1 S13 million 2 $2 million 0 2 Jack thinks that it is a simple task, so he should be done very soon with his analysis and his final report. He knows that they have previously used a required return of 10% for investments with similar risk to this one, so he wants to use that return in his calculations. First, he wants to use the IRR method to find the expected % return from this investment. When he enters the cash flows into his calculator, he finds the IRR. By looking at this number, he knows whether his company should invest in this project. Just as he was writing his report, he remembered something from his MBA class. Maybe the decision is not as simple as he thinks. What do you think? Should he go ahead and submit his final report to his boss or should he continue analyzing the numbers? Hint: Think about the problems with IRR. The IRR method is weak in some cases 2. What type of problems does the IRR method have in general? Has Jack encountered any one of these problems? 3. When evaluating a project, does NPV and IRR always lead to the same conclusion (accept, or reject)? Why or why not? 4. When choosing between two projects, do NPV and IRR always lead to the same conclusion? Why or why not? 5. "Ahha" he Profile. He finds that over a certain range of discount rates, the project is acceptable. What do you think the acceptable range of discount rates is for this project? Jack decides to draw the NPV Profile for this project. After drawing the NPV Profile, said. He now sees that the decision here can be made more easily with the NPV

Explanation / Answer

As per rules I will answer the first 4 subparts of the question

1. The internal rate of return is that rate at which the present value of in flows from an investment are equal to the initial investment. When cash flows during the project are negative in certain period after the initial period a multiple internal rate of return problem may occur. This is the case in the given scenario where the cash flows are negative in period 2. Hence internal rate of return will not give a conclusive result as there can be multiple IRRs.

2. The internal rate of return method does not portray the dollar contribution by this project. Jack hence will not be able to me analyse the value added by this particular project if uses the IRR method. Moreover the problem of multiple IRR may arise which is again encountered by Jack.

3. In case of a single conventional project both npv and IRR methods will provide the same result. This means that if the npv is positive the IRR will be greater than the required rate of return and if npv is negative the IRR will be lower than the required rate of return. This is because projects will have positive net present value only if the rate of return is higher than the required rate and vice versa.

4. The conflicts may arise when comparing two mutually exclusive projects with different cash flow patterns. This may be due to difference in the initial investment, difference in the cash flow pattern or difference in the lives of the projects.

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