For an incremental analysis, projects are ordered by

Question

BlackTom AI · Accepted Answer

Their IRRs — ordering projects by their internal rates of return is the standard first step in incremental analysis for choosing among mutually exclusive alternatives.

1. Relevant knowledge points and concepts
- Internal Rate of Return (IRR): the discount rate that makes the net present value (NPV) of a project’s cash flows equal zero.
- Incremental analysis (for mutually exclusive projects): compare the extra (incremental) cash flows of a larger project versus a smaller one and compute the IRR of those incremental cash flows to decide if the larger project adds value relative to the smaller.
- Time value of money: IRR incorporates timing and magnitude of cash flows, unlike a simple initial investment or total outflows.

2. Complete reasoning process (step-by-step)
- Step 1: Compute each project’s IRR.
- Step 2: Order projects by IRR (typically from lowest to highest).
- Step 3: Take two adjacent projects in that order (e.g., project i and project i+1 where i+1 has higher IRR).
- Step 4: Construct incremental cash flows: ΔCFt = CFt(project i+1) − CFt(project i) for each period t (initial outflow and subsequent inflows).
- Step 5: Calculate the IRR of the incremental cash flows by solving 0 = Σt ΔCFt / (1 + IRR_incremental)^t.
- Step 6: Compare IRR_incremental to the required rate (hurdle rate). If IRR_incremental > required return, choose the larger (i+1) project; otherwise choose the smaller (i).

3. Intermediate calculation form
- Incremental IRR equation: 0 = ΔCF0 + ΔCF1/(1+IRR_inc) + ΔCF2/(1+IRR_inc)^2 + ... Solve for IRR_inc.

4. Why the correct answer is correct
- Ordering by IRRs ensures comparisons are made in a consistent sequence so the incremental project represents the additional returns from moving to the next-higher IRR alternative. IRR incorporates timing and return rates, which are central to incremental decisions.

5. Why other options are incorrect
- Initial investment amounts or total cash outflows ignore timing and subsequent inflows (time value of money), so they can mislead selection.
- “Any of these could be used” is wrong because only IRR ordering directly addresses return rates needed for incremental IRR comparisons.

Conclusion: Ordering projects by their IRRs is the correct approach for incremental analysis, matching the provided answer: their IRRs.

For an incremental analysis, projects are ordered by单项选择题

类似问题

Which ONE of the following statements is MOST ACCURATE?

According to Dr Paul Hardisty, when there was a major oil spill off the coast of Louisiana and Texas, the GDP of those states actually increased. This was because: Select a single answer.

FAR analysis mainly determines:

Under typical participation exemption regimes, dividends may be exempt provided that:

A US entity owns 100% of several CEs, and it is itself owned 79% by another CE which consolidates the US entity and its subsidiaries. What is the US entity?

When evaluating the performance of hedge funds, which of the following factors can make this task more complicated?[Fill in the blank]

The behaviour by the Reserve Bank of Australia is a key factor underlying the link between __ and _, and is summarised by the aggregate-demand curve.[Fill in the blank]

更多留学生实用工具

智能学习助手

风格化写作助手

论文查重助手

文献引用助手

课堂转译助手

课堂笔记助手

Quiz搜索助手

学校历年真题

智能刷题助手

智能匹配练习

希望你的学习变得更简单