Discuss potential problems with the use of IRR

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Reference no: EM131892013

1. A project costs $200,000, produces annual cash inflows of $20,000, and has a discount rate of 8%. Explain how you can quickly determine the difference in the NPV of the project if the cash inflows last only 30 years rather than 40 years. Show the calculations needed to determine the amount of the NPV difference.

2. The use of NPV as an investment criterion is said to be more reliable than using IRR. Discuss potential problems with the use of IRR.

3. XYZ Corporation is experiencing hard capital rationing and will not be able to invest more than $1,000,000 this year. Develop a profitability index for the following four projects and indicate which projects will be accepted. All four projects will last 3 years and the firm uses a 10% discount rate.

Reference no: EM131892013

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