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What is the role that the required rate of return plays in the NPV model? In...

What is the role that the required rate of return plays in the NPV model? In the IRR model?

Consider some real-life example situations where NPV and IRR should be applied and why rate of return is so important.

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Expert Solution

The expected rate of return is highly important in calculation of Net present value as the expected rate of return is used as a discounting rate when the future cash flows are discounted to the present values.

the expected rate of return is highly important when comparison with internal rate of return. If the expected rate of return is higher than internal rate of return, the project must not be accepted and if the expected rate of return is lower than internal rate of return the project is to be accepted.

there are application of net present value and internal rate of return in deciding upon various capital budgeting projects and acceptability or rejection of different project. It can also be applied through various projects where major concern is time value of money.

rate of return is highly important because it provides an estimation about the investors expectations and the acceptability about the rate of return he wants to make on certain investment.

jeff jeffy answered 1 year ago
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