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Project Value Comparison
Which of the two projects, 7 or 8, is more attractive?
Project 8 is more attractive compared to project 7. The reason for this being that project 8 has a higher sum of cash flow benefits over its life. In addition, the net present value of the project is higher than that of project 7.
How sensitive is our ranking to the use of high discount rates?
The ranking methods used are sensitive to high interest rates. At a discount rate of over 10%, there are significant changes in the ranking of the projects. A common observation is that the rank of any given project declines with the increase in the discount rates.
Why do NPV and IRR disagree?
The cause of the disagreement between the NPV and IRR ranking of the projects is due to the differences in the metrics of measurement. While the NPV measures the discounted present value of the entire project cash flows, IRR provides a measure of the average returns of the project over its life. Fundamentally, therefore, these measure different aspects of the project and would therefore disagree.
Project Value Comparison
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What rank should we assign to each project?
Using the NPV method and a 10% discount rate, project 3 ranks first, project 4 second, project 8 third, project 7 fourth, project 5 fifth, project 1 sixth, project 6 seventh, and project 2 eighth.
Why do payback and NPV not agree completely?
Payback is a measure of the time and number of periods that the project would take to recover the initial investment. On the other hand, NPV is a measure of the discounted present value of the project. This fundamental difference in measurements causes the two methods to differ. In addition, the project with the shortest payback may not provide value to the investor who is looking at increasing the value of their investment.
Why do average return on investment and NPV not agree completely?
Return on investment measures the value of returns to the investor, while NPV measures the value of the project at the current time. AS such, they measure different aspects of the project and are bound to differ.
Project Value Comparison
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Which criterion is best?
The net present value (NPV) is the best criterion as it measures the performance of the project itself. In addition, NPV uses discounting to portray the value of the project at the current time by considering the time value of money.
Are those projects comparable based on NPV?
The comparison of the projects are based on the current value of the projects. As such, NPV is a good measure for the projects.
Because the projects have different lives, are we really measuring the “net present” value of the short-lived projects?
Yes. The short term projects have the same basis of comparison since the values of future cash flows are discounted back to the present using the same discount factor without regard for the length of the project.
What is the equivalent-annuity method and when is it called for in project comparisons?
The equivalent annuity method is a measure of the average payout over the life of the project. The measure is important when comparing projects with a similar life.
Project Value Comparison
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