Investment decision rules

Investment decision rules

1. 1. Project Alpha: invest $1, get $2 back (NPV = $0.82, IRR = 100%). Project Beta: invest $1,000,000, get $1,200,000 back (NPV ≈ $90,900, IRR = 20%). Cost of capital = 10%. Mutually exclusive — which do you pick?

   Alpha — higher IRR is betterBeta — higher NPV means more dollar value createdEither — both have positive NPVNeither — IRRs are inconsistent

2. 2. A mining project has cash flows -100, +230, -132 (cleanup at end). How many real IRRs does this have?

   ZeroOneTwoThree

3. 3. Which of the following are legitimate uses of the payback period rule?

   Quick liquidity screen for early-stage startups with limited cash runwayPrimary decision criterion for selecting between mutually exclusive 30-year projectsCommunicating intuition to non-technical stakeholdersDefinitive ranking when NPV and IRR disagree

4. 4. When do NPV and IRR always agree on accept/reject?

   Always; they're equivalent rulesNever; they always disagreeFor a single conventional project (one negative CF then all positive)Only when the discount rate equals the IRR

5. 5. A firm has a $100M capital budget and three independent projects: A (invest $100M, NPV $40M), B (invest $50M, NPV $30M), C (invest $50M, NPV $25M). Which set maximizes value within the budget?

   A alone, because it has the highest NPVB and C, because their profitability index (NPV per dollar invested) is higherA and B, because they have the two highest NPVsAll three, because each has positive NPV