Question

“Two companies examined the same capital budgeting project, which has an internal rate of return equal to 19 percent. One firm accepted the project, but the other firm rejected it. One of the firms must have made an incorrect decision.” Discuss the validity of this statement. How does agility fit into the decision? Explain.

Answer 1

The internal rate of return (IRR) is the discount rate that results in a net present value of zero for a series of future cash flows.

As per the IRR rule the project will be beneficial if the internal rate of return is greater than the required rate of return. In the given scenario the firm that accepted the project would have accepted it if it's required rate of return was lesser than the internal rate of return of the project. The firm that rejected it may have rejected it incorrectly if it's required rate of return was also lesser then the internal rate of return of the project.

On the other hand the firm that accepted the project may have made an incorrect decision if its required rate of return was more than 19%. Moreover the agility of the project should also be taken into account. The firm that accepted the project may have ignored the lack of agility the project provides. Business agility refers to  simply the notion that your business should not be tied down by the data and infrastructure. This will increase the overall ROI of the business.