Explain the logic behind the net present value decision rule and the internal rate of return...

Explain the logic behind the net present value decision rule and the internal rate of return decision rule.

Expert Solution

The net cash flows are determined and they are discounted back to present values. Net present value gives company management a clearer picture of whether an investment will add value to the company. If the net present value has a positive value, it will add value and benefit the company’s shareholders. The project with the highest net present value is selected.

It is used in making capital budgeting decisions. Net present value helps to find out if the projected future cash flows cover the future cost of starting and running a business. It helps to understand how much an investment or project is worth.

Internal Rate of Return is the rate of return that makes the net present value of all cash flows of a certain investment equal to zero. It is helpful in comparing investments and making capital budgeting decisions.

If the internal rate of return is higher or equal to the cost of capital, the project should be accepted. If the internal rate of return is lesser than the cost of capital, the project should be rejected.

jeff jeffy answered 2 years ago

Internal rate of return and net present value are related in that: Internal rate of return...

Internal rate of return and net present value are related in that: Internal rate of return formed the basis for the eventual development of the net present value theory. Internal rate of return finds a discount rate that produces a net present value of zero. Net present value formed the basis for the eventual development of the internal rate of return theory. Net present value can only be used to evaluate irregular cash flows, whereas internal rate of return can...

Net Present Value, Internal Rate of Return, and Pay Back Period are decision rules used to...

Net Present Value, Internal Rate of Return, and Pay Back Period are decision rules used to evaluate the possibility of investments in capital projects. NPV>0, IRR>Hurdle Rate (or IRR>Cost of Capital), and acceptable Pay Back Period relative to capital constraints. How are these rules challenged amid the pandemic and do you envision corporations relaxing or tightening the application of these rules in their corporate planning processes moving forward, as they navigate their response to unprecedented circumstances? What other "rules" /...

PAYBACK, ACCOUNTING RATE OF RETURN, PRESENT VALUE, NET PRESENT VALUE, INTERNAL RATE OF RETURN All four...

PAYBACK, ACCOUNTING RATE OF RETURN, PRESENT VALUE, NET PRESENT VALUE, INTERNAL RATE OF RETURN All four parts are independent of all other parts. Assume that all cash flows are after-tax cash flows: a. Randy Willis is considering investing in one of the following two projects. Either project will require an investment of $10,000. The expected cash flows for the two projects follow. Assume that each project is depreciable. Year Project A Project B 1 $ 3,000 $3,000 2 ...

What is the relationship among present value, net present value, and internal rate of return? Is...

What is the relationship among present value, net present value, and internal rate of return? Is there a consistent relationship at all possible values for these measures?

What is the internal rate of return, net present value with a 10% interest rate, and...

What is the internal rate of return, net present value with a 10% interest rate, and net present value with a 20% interest rate of this project. The cash flows are as follows: Year 0 - Initial investment - 20,000 (make sure to make investments negative values in Excel cash flow) Year 1 - 8,000 Year 2 - 8,000 Year 3 - 9,000 Year 4- 12,000 No value after year 4.

What is the Net Present Value? What is the Internal Rate of Return? What is the...

What is the Net Present Value? What is the Internal Rate of Return? What is the Payback Period?

What are the differences in the calculations of net present value and internal rate of return

If you compare the internal rate of return to the net present value, the IRR is...

If you compare the internal rate of return to the net present value, the IRR is more reliable when you are evaluating mutually exclusive projects. the IRR is easier to apply when the cash flows are non-normal. they are very similar because the IRR is the discount rate that makes the NPV equal to one. will provide the same accept or reject answer unless you have scale differences between projects. will provide the same accept or reject answer if you...

PAYBACK, ACCOUNTING RATE OF RETURN, NET PRESENT VALUE, INTERNAL RATE OF RETURN Ripit Company wants to...

PAYBACK, ACCOUNTING RATE OF RETURN, NET PRESENT VALUE, INTERNAL RATE OF RETURN Ripit Company wants to buy a numerically controlled (NC) machine to be used in producing specially machined parts for manufacturers of tractors The outlay required is $480,000. The NC equipment will last five years with no expected salvage value. The expected after-tax cash flows associated with the project follow: Year Cash Revenues Cash Expenses 1 $780,000 $600,000 2 780,000 600,000 3 780,000 ...

Payback, Accounting Rate of Return, Net Present Value, Internal Rate of Return Follow the format shown...

Payback, Accounting Rate of Return, Net Present Value, Internal Rate of Return Follow the format shown in Exhibit 14B-1 and Exhibit 14B-2 as you complete the requirements below. Booth Company wants to buy a numerically controlled (NC) machine to be used in producing specially machined parts for manufacturers of tractors. The outlay required is $960,000. The NC equipment will last 5 years with no expected salvage value. The expected after-tax cash flows associated with the project follow: Year Cash Revenues...

Question