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    Table 1. Synthetic Resin Cash Flows

    Synthetic Resin

    Year

    0

    1

    2

    3

    4

    5

    Net Income

    		 

    $150,000

    page2image18608

    $200,000

    page2image20104

    $300,000

    $450,000

    $500,000

    Depreciation

    		 

    $200,000

    $200,000

    $200,000

    $200,000

    $200,000

    Net Cash Flow

    $(1,000,000)

    page2image31296

    $350,000

    page2image33568
    page2image33728

    $400,000

    $500,000

    $650,000

    $700,000

    Table 2. Epoxy Resin Cash Flows

    Epoxy Resin

    Year

    0

    page2image45312

    1

    page2image46672
    page2image47576

    2

    page2image48504

    3

    4

    5

    Net Income

    		 

    $440,000

    page2image55480

    $240,000

    page2image56976

    $140,000

    $ 40,000

    $ 40,000

    Depreciation

    		 

    $160,000

    $160,000

    $160,000

    $160,000

    $160,000

    Net Cash Flow

    $(800,000)

    $600,000

    $400,000

    $300,000

    page2image72496
    page2image72816

    $200,000

    page2image73744
    page2image74064
    		 

     

     

     

    calculate the IRR and NPV for each project. Tim wants to convince the Board that the IRR measure can be misleading when choosing between mutually exclusive alternatives. Why is the IRR decision rule unreliable in making the correct choice between the two projects? Tim’s presentation should inform the board on the different reinvestment assumptions underlying IRR and NPV and how that relates to the reliability of the IRR decision rule. What is the correct reinvestment assumption and why? 

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    DavidSmart
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