. Assume the projects are mutually exclusive, that they have equal lives and equ
ID: 2673414 • Letter: #
Question
. Assume the projects are mutually exclusive, that they have equal lives and equal risk, and that the firm does not face financial (or other) constraints. Assume also that the appropriate cost of capital is 10%.A B
IRR 18% 27%
NPV @ 10% $1,665 $1,601
Payback 7 years 4 years
Profitability Index 1.67 2.00
The IRR reinvestment rate assumption is
a. Always unrealistic
b. More realistic for project B than for project A
c. More realistic for project A than for project B
d. More realistic than the NPV re-investment rate assumption for both projects.
At the 10% discount rate, the interest rate sensitivity is greater for
a. Project A than for project B
b. Project B than for project A
c. The sensitivity is the same for both projects at all discount rates.
d. The sensitivity cannot be inferred for these projects.
Please explain briefly for A+ rating.
Explanation / Answer
. Assume the projects are mutually exclusive, that they have equal lives and equal risk, and that the firm does not face financial (or other) constraints. Assume also that the appropriate cost of capital is 10%.
A B
IRR 18% 27%
NPV @ 10% $1,665 $1,601
Payback 7 years 4 years
Profitability Index 1.67 2.00
The IRR reinvestment rate assumption is
b. More realistic for project B than for project A
BECAUSE OG HIGH IRR 27%
At the 10% discount rate, the interest rate sensitivity is greater for
c. The sensitivity is the same for both projects at all discount rates.
discount rate---------------APPLIES SAME FOR BOTH PROJECTS
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