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.

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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 1 year ago

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