In investment decision analysis you may need to calculate internal rate of return. “Internal rate of return (IRR) is the discount rate that gives the project a zero NPV” (McLaney, 2006). It is a good choice to use for investment projects. There is a formula for the internal rate of return:

(A is the lower discount rate and B is the higher rate, a is the NPV at the lower rate and b is the NPV at the higher rate.) For example the Net Present Value (NPV) is 88 when the discount rate is 20%, and the NPV is 12 when the discount rate is 30%. Therefore the IRR in this situation is 28.8%. The consequence should be compared with the rate of return which the company’s required. If the IRR higher than that, the project should be accepted otherwise it will not be accepted.

From our lecturer Linda’s lectures we knew that there are some advantages and disadvantages. The internal rate of return is simple to interpret and calculate which more easily understand than some other methods; and it is good if it uses with NPV. However there are some drawbacks as well: the output is a percentage rather than the physical size of the earnings; it may produce more than one rate of return which may make the user confused; some managers may not familiar with this method and it is difficult to calculate by hand. The internal rate of return approach is usually used for a corporation’s investment.

NPV and IRR take full account of cash flows and the time value of money. When we use NPV to decide whether the project will be accepted or not, the condition is that NPV should above 0. Otherwise the investment should be rejected. In the same situation, it is better to use the project which NPV is higher than others. However if we use IRR approach, the rate should be higher than what the company requires. Eddie McLaney (2006) mentioned that IRR cannot deal with different required rates of return which Pike, R & Neale, B (2006) have pointed out in four areas:...

...A. net present value.
B. internalrate of return.
C. accounting return.
D. profitability index.
E. payback period.
The internalrate of return is defined as the:
A. maximum rate of return a firm expects to earn on a project.
B. rate of return a project will generate if the project in financed solely with internal funds.
C. discount rate that equates the net cash inflows of a project to zero.
D. discount rate which causes the net present value of a project to equal zero.
E. discount rate that causes the profitability index for a project to equal zero.
Which two methods of project analysis were the most widely used by CEO's as of 1999?
A. net present value and payback
B. internalrate of return and payback
C. net present value and average accounting return
D. internalrate of return and net present value
E. payback and average accounting return
The length of time a firm must wait to recoup, in present value terms, the money it has in invested in a project is referred to as the:
A. net present value period.
B. internalreturn period.
C. payback period.
D. discounted profitability period.
E. discounted...

...InternalRate of Return (IRR) and Net Present Value (NPV) are both powerful tools used in business to determine whether or not to invest in a particular project; both methods have its pros and cons. If given a choice I would choose NPV, because of the potential to anticipate profitability.
As it is assumed that the objective of a firm is to create as much shareholder wealth as possible for its owners through the efficient use of resources, the preferred method in determining whether or not to invest in a project is NPV. The reason for this is that NPV takes into account all the costs and benefits of an investment opportunity, making a logical allowance for the time factor. Generally speaking any appraisal that returns a positive NPV result is a worthwhile investment. This means finding the NPV of a business will have a direct bearing on shareholder wealth. Net present value is a way of comparing the value of money now with the value of money in the future. A dollar today is worth more than a dollar in the future, because inflation erodes the buying power of the future money, while money available today can be invested and grow.
There are two advantages NPV as a capital expenditure appraisal technique it accurately recognizes the time value of money for all expenditures, regardless of the exact time at which they are made or received it enables alternative proposals to be ranked in order of attractiveness it...

...There are two Proposals. Proposal A and Proposal B. Both cost the amount of $ 60,000. The discount rate is 10%. The cash flows before depreciation and tax are as follows:
Year Proposal A Proposal B
$ $
0 (60,000) (60,000)
1 18,000 19,000
2 15,000 17,000
3 18,000 19,000
4 16,000 14,000
5 19,000 15,000
6 14,000 13,000
Evaluate the above proposals according to:
1. Pay Back Period.
2. Accounting Rate of Return (ARR)
3. Net present value method (NPV)
Proposal A is better than B, because ARR and NPV are higher than Proposal B
2. There are two Proposals. Proposal A and Proposal B. Proposal A costs $ 80,000 and Proposal B costs $ 100,000. The discount rate is 10%. The cash flows before depreciation and tax are as follows:
Year Proposal A Proposal B
$ $
1 13,000 15,000
2 15,000 14,000
3 18,000 19,000
4 16,000 16,000
5 19,000 13,000
6 14,000 13,000
7 16,000 19,000
8 20,000 15,000
9 0 18,000
10 0 17,000
Evaluate the above proposals according to:
1. ARR
2. NPV
3. Pay Back Period
We can select Proposal A, because ARR, NPV and PBP are positive and reject Proposal B
3.There are two Proposals. Proposal A and Proposal B. The discount rate is 8%. The cash flows before...

...invest $1000 today at an interest rate of 10% per year, how much will you have 20 years from now, assuming no withdrawals in interim?
2. a. If you invest $100 every year from the next 20 years starting one year from today and you earn interest of 10% per year, how much will you have at the end of the 20 years?
b. How much must you invest each year if you want to have $50000 at the end of the 20 years?
3. What is the present value of the following cash flows at an interest rate of 10% per year? (Hints: don’t need to use the financial keys of your calculator, just dome common sense)
a. $100 received five years from now
b. $100 received 60 years from now
c. $100 received each year beginning one year from now and ending 10 years from now
d. $100 each year beginning one year from now and continuing forever
4. You want to establish a “wasting” fund, which will provide your with $1000 per year for four years, at which time the fund will be exhausted. How much must you put in the fund now if you can earn 10% interest per year?
5. You take a one-year installment loan of $1000 at an interest rate of 12% per year (1% per month) to be repaid in 12 equal monthly payments.
a. What is the monthly payment?
b. What is the total amount of interest paid over the 12-month term of the loan?
6. You are taking out a $100000 mortgage loan to be repaid over 25 years in 300 monthly payments.
a. If the...

...InternalRate of ReturnInternalRate of Return (IRR)
Calculation of the true interest yield expected from an investment. Explanation of InternalRate of Return. What is InternalRate of Return? Definition The InternalRate of Return (IRR) is the discount rate that delivers a net present value of zero for a series of future cash flows. It is an Discounted Cash Flow (DCF) approach to valuation and investing. As is Net Present Value (NPV). IRR and NPV are widely used to decide which investments should be undertaken, and which investments not to make. Difference of IRR and NPV The major difference is that while Net Present Value is expressed in monetary units (Euro's or Dollars for example), the IRR is the true interest yield expected from an investment expressed as a percentage. InternalRate of Return is the flip side of Net Present Value and is based on the same principles and the same calculations. NPV shows the value of a stream of future cash flows discounted back to the present by some percentage that represents the minimum desired rate of return, often your company's cost of capital. IRR, on the other hand, computes a break-even rate of return. It...

...InternalRate of Return
Meaning of Capital Budgeting
Capital budgeting can be defined as the process
of analyzing, evaluating, and deciding whether
resources should be allocated to a project or
not.
Capital budgeting addresses the issue of
strategic long-term investment decisions.
Process of capital budgeting ensure optimal
allocation of resources and helps management
work towards the goal of shareholder wealth
maximization.
Why Capital Budgeting is so Important?
Involve massive investment of resources
Are not easily reversible
Have long-term implications for the firm
Involve uncertainty and risk for the firm
Capital Budget Techniques
Net PresentValue
Discounted
BenefitCost/Profitability
Index Ratio
IRR
Capital Budget
Techniques
Accounting Rate
of Return
Non Discounted
Payback
Period
InternalRate of Return
The rate at which the net present value of cash
flows of a project is zero, I.e., the rate at which
the present value of cash inflows equals initial
investment
Project’s promised rate of return given initial
investment and cash flows.
Consistent with wealth maximization
Accept a project if IRR ≥ Cost of Capital
Question
The management is considering to acquire an
equipment costing $1,00,000 . It is expected...

...000 | |
6 | 500,000 | |
7 | 500,000 | 5,650,000 |
a. Compute the NPV and IRR for the above two projects, assuming a 13% required rate of return.
b. Discuss the ranking conflict.
c. What decision should be made regarding these two projects?
Answer:
a. NPV of A = $211,305 NPV of B = $401,592.64
IRR of A = 16.33% IRR of B = 15.99%
b. The later cash flow of B causes its lower IRR even though it has the higher NPV.
c. B should be accepted because it is the mutually exclusive project with the highest positive NPV.
Keywords: NPV, IRR
AACSB: Analytic skil
4) Tangshan Mining Company must choose its optimal capital structure. Currently, the firm has a 40 percent debt ratio and the firm expects to generate a dividend next year of $4.89 per share and dividends are grow at a constant rate of 5 percent for the foreseeable future. Stockholders currently require a 10.89 percent return on their investment. Tangshan Mining is considering changing its capital structure if it would benefit shareholders. The firm estimates that if it increases the debt ratio to 50 percent, it will increase its expected dividend to $5.24 per share. Because of the additional leverage, dividend growth is expected to increase to 6 percent and this growth will be sustained indefinitely. However, because of the added risk, the required return demanded by stockholders will increase to 11.34 percent....

...discuss the net present value (NPV), payback period (PBP) and internalrate of return (IRR) approaches for a project evaluation. It is often said that NPV is the best approach investment appraisal, which I why I will compare the strengths and weaknesses of NPV as well as the two others to se if the statement is actually true.
Introduction
To start of, the essay will attempt to explain the theoretical rationale of the net present value approach to investment appraisal as well as its strengths and weaknesses. From there, introduce the payback period method and then internalrate of return approach, as well as to consider their strengths and weaknesses. After outlining and explaining the three different approaches, it will finish up with comparing the different three and in a conclusion.
NPV
Net present value or NPV is an approach used to determine the value of an investment today (present) compared to the value of the investment in the future after taking the inflation and return into account. In simpler words, it compares the value of 1 pound today with the same pound in the future. Net present value is used in capital budgeting to analyze the profitability of an investment. It is usually calculated using tables and spreadsheets such as Microsoft Excel, but the main formula used to calculate net present value looks like this:
Where
C0 = Cash outflow at time t=0
Ct...

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