For the given cash flows below, assume the cash flow is the same in the next 2 years. Compute the NPV for each project, and compute the incremental IRR. Compare and explain why NPV always gives the correct decision.
Project Initial Investment Year 1 Cash Flow A 500,000 125,000 B 500,000 120,000
In what ways can the IRR make you give a flawed decision and what relationship the NVP have with the IRR?
What is the best way to select a project that has resource restrictions?
Explain. Why must opportunity costs be included in cash flows, while sunk costs and interest expense must not?
Compare and contrast the uses of break-even analysis and sensitivity analysis in evaluating project risk. What are the effects of coupon rate to the sensitivity of a bond price and to changes in interest rates?
What is the relation between a corporate bond’s expected return and the yield to maturity. In your answer, define default risk and explain how these rates incorporate default risk Why should investors who identify positive-NPV trades be skeptical about their findings if they don’t inside information or a competitive advantage? What return should the average investor expect to receive?