# Corporate Finance - Corporate Finance Section 2

>>>>>>>>Corporate Finance Section 2

• A

The size of the two projects is the same.  • B

Risk of the projects as reflected in the required rate of return.  • C

Differing cash flow patterns.  • Option : C
• Explanation : Conflicts between the NPV decision and IRR are due to the scale/size of the project or the different cash flows pattern. Since the size is the same the difference in cash flows will cause the conflict.

• A

stay the same and the NPV would decrease.  • B

stay the same and the NPV would stay the same.  • C

decrease and the NPV would decrease.  • Option : A
• Explanation : The IRR would stay the same because both the initial outlay and the after-tax cash flows halve, so that the return on each dollar invested remains the same. All of the cash flows and their present values also reduce in half. The difference between the total present value of the future cash flows and the initial outlay (the NPV) also halves.

• A

No, because a project with a positive IRR has a positive NPV.  • B

No, because a project with such a rapid payback period has a positive NPV.  • C

Yes.  • Option : C
• Explanation : If the cumulative cash flows in the first two years equal the outlay and additional cash flows are not very large, this scenario is possible. For example, assume the outlay is 100, the cash flow in Year 1 and 2 is 50 each and the cash flow in Year 3 is 3. The required return is 10 percent. This project would have a payback of 2.0 years, an NPV of -10.97, and an IRR of 1.94 percent.

 Cash Flows Year 0 1 2 3 4 NPV IRR(%) Project A -50 0 0 0 110 17.77 21.79 Project B -50 22 22 22 22 15.02 27.18

• A

a rate between 21.79 percent and 27.18 percent.  • B

a rate between 0.00 percent and 12.00 percent.  • C

a rate between 12.00 percent and 21.79 percent  • Option : C
• Explanation : For these projects, a discount rate of 15.09 percent would yield the same NPV for both (an NPV of 11.03). The cross over point needs to be before the lower IRR (21.79).
Note: The discount rate (crossover point) at which both the projects have the same NPV is the IRR for the differences in cash flows of the projects. For instance, in this case, it is CF0 = 0, CF1 = -22, CF2 = -22, CF3 = -22, CF4 = 88, CPT IRR. IRR = 15.09%.

 Year 0 1 2 Cashflows -1.6 10 -10

• A

25 percent only.  • B

25 percent and 600 percent.  • C

25 percent and 400 percent.  