What reinvestment rate assumptions are built into the NPV, IRR, and MIRR methods? Give an explanation for your answer.

A firm has a $100 million capital budget. It is considering two projects, each costing$100 million. Project A has an IRR of 20% and an NPV of $9 million; it will be terminated after 1 year at a profit of$20 million, resulting in an immediate increase in EPS. Project B, which cannot be postponed, has an IRR of 30% and an NPV of $50 million. However, the firm’s short-run EPS will be reduced if it accepts Project B because no revenues will be generated for several years. a. Should the short-run effects on EPS influence the choice between the two projects?

Project X is very risky and has an NPV of $3 million. Project Y is very safe and has an NPV of$2.5 million. They are mutually exclusive, and project risk has been properly considered in the NPV analyses. Which project should be chosen? Explain.

Why might it be rational for a small firm that does not have access to the capital markets to use the payback method rather than the NPV method?

Discuss the following statement: If a firm has only independent projects, a constant WACC, and projects with normal cash flows, the NPV and IRR methods will always lead to identical capital budgeting decisions. What does this imply about the choice between IRR and NPV? If each of the assumptions were changed (one by one), how would your answer change?