Answers to Mini-Case Questions

The team also chose to calculate IRR as another method of evaluating the Super Project. Again

Internal Rate of Return is a discount rate in which the net present value of an investment becomes zero. The investment should be accepted if the IRR is not less than the cost of capital. The IRR measures risk, by showing what the discounted rate would have to reach to lose all present value. Futronics Inc. investment would have an IRR of 14.79%. The investment should be accepted since it is greater than the 8% cost of capital. The 14.79% IRR shows the growth expected from the

The payback’s reciprocal would be more useful for projects with very long lives. The payback reciprocal is best used when the useful life of an investment is twice the payback period. The IRR rises when the useful life of an investment increase which would then get closer to the higher reciprocal.

Similarly, Karaoke Beach Pub ranked first in terms of IRR and NPV. Evaluation using IRR might have multiple values and assumes that interim cash flows can be reinvested at the IRR, which may not be as accurate as desired. Using NPV for project evaluations can show actual economic gain with respect to the time value of money. However, it is not appropriate for comparing projects with different lifetimes. Thus, the four criteria are still not sufficient to arrive at a conclusion.

A project may have more than one IRR, especially when returns of an investment yield negative cash flows following positive cash flows.

1. What is the appropriate required rate of return against which to evaluate the prospective IRR 's from the B ANSWER:The appropriate rate of return against which to evaluate the IRR is the risk-free rate, plus the market risk

The IRR for this agreement ranges between 11.87% and 13.01%. The return on investment (ROI) for this particular agreement ranges between 52% and 58%. In either case, the numbers range because of provision (c) listed in the case’s Exhibit 1. The “deferred setup fee” fluctuates depending on potential sales of RMT’s assets.

1. The cause to the conflict in the rankings is that while the IRR ranking shows a percentage so that you can see what percentage you are making on certain amount, it does not show the size of the project.

The discount rate is a means of calculating a value now of benefits that occur in the future. The discount rate recognizes the time value of money. A four percent real discount rate is used in the calculations. However, the high-speed train project would be economically feasible even under the higher discount rates used by some public agencies and economists. The Internal Rate of Return (IRR) is an evaluation measure that is

NPV and IRR: When examining the NPV and the IRR of the Merseyside project, the numbers were very attractive. It had a positive net present value and an IRR above 10 percent. By these numbers, along with others,

58). This investment has an IRR of 49%. However, this needs to be compared to other competing investments to determine priority of the project.

It is important to first note that since NPV is the preferred choice of examining a project here at BBI, we can agree that accepting a project that generates a positive NPV will benefit stockholders (greater return) as well as increase the overall value of the firm (Ross et al., 2014). Additionally, it is also essential to supplement our findings by computing our internal rate of return (IRR), which produces the return of a project without any external factors included (Ross et al., 2014). However, the determining

This means that you have more money coming in then you have leaving. The next number is called the internal rate of return (IRR). This is expressed or shown as a percentage. This allows you to compare your profitability of the project to the cost of capital or the interest you need to pay. If your options IRR are greater than the cost of capital then your option are considered profitable. Then there is the profitability index (ratio) shows how profitable the project is versus the initial investment. Anything above the one is considered a good thing. You may not understand what a ratio. A ratio is simple a number that represents the dollar when used to measure money. If you have profitably index of 1.43 that means that you have one dollar and forty-three cents to every dollar of the initial investment. The present value is the amount of money the investment will make over in this case a five-year period. How does it work? The process takes into account the cost of capital an times it against the total amount profit made over a set period in this case five years. The results display the amount of money or capital over the five-year period and if the amount is greater than the initial investment, it is considered profitable.

Internal Rate of Return (IRR): Discount rate (r = IRR) that sets NPV = 0 accept the IRR > discount rate for investing type project. Higher is better

The internal rate of return (IRR) is the discount rate that equates the present value of the cash flows and the cost of the investment