项目可行性分析预估—project appraisal 1.2.docVIP

B. INTERNAL RATE OF RETURN (IRR) Problems with IRR Multiple solutions e.g., if you try cashflows; -3,000 (time=0), +15,000 (time=1), -13,000 (time=2), you will find two IRRs 11.56% and 288.4% Ranking IRR does not consider the size/scale of project. Why then is it a popular method? Psychological. No requirement of calculating the cost of capital. QUESTION Seddet International is considering four major projects which have either two- or three-year lives. Projects T0 T1 T2 T3 A -5,266 2,500 2,500 2,500 B -8,000 0 0 10,000 C -2,100 200 2,900 0 D -1,975 1,600 800 0 Other firms’ shares in this risk class have generally given a return of 16% per annum. The manager vaguely understands IRR and insists that you use this to calculate which of the four projects should be proceed with, if there are no limitations on the number which can be undertaken. State which is the best project if they are mutually exclusive, using IRR Use the NPV decision rule to rank the projects and explain why, under condition of mutually exclusivity, the selected project differs from that under (b). Write a report for the managing director, detailing the value of the NPV for shareholder wealth enhancement and explaining why it may be considered of greater use than IRR. 13