Answer to Question #302542 in Marketing for riri

Question

You are reviewing a financial model prepared by someone who hasn't taken MKM704. The proposal being analyzed requires an upfront

investment of $8.0 million and the company has a hurdle rate of 12%. The output from the individual's model shows a NPV of $1.2 million and

an IRR of 10.5%. What do you conclude about the analysis and why?

Answer 1

The difference between the current value of cash inflows and withdrawals over a period of time is known as net present value (NPV).

The idea behind NPV is to project all of an investment's future cash inflows and outflows, discount them to the present day, and then add them all up. The investment's net present value (NPV) is calculated by combining all positive and negative cash flows together.

The model has a positive net present value (NPV) of $1.2 million, which means that the expected earnings from a project or investment will surpass the expected costs. An investment with a positive net present value (NPV) is assumed to be profitable.

The internal rate of return (IRR) is a financial statistic that is used to calculate the profitability of possible investments. If the IRR on a project or investment is more than the minimal cost of capital, the project or investment can be undertaken, according to the IRR rule. If the IRR on a project or investment is less than the cost of capital, rejecting it may be the best course of action. The IRR of the model is 10.5 percent, which is lower than the cost of capital, which is 12 percent. As a result, the investment should be turned down.

The project will be lucrative and should be continued, however the investment should be denied because its IRR is less than its cost of capital, according to NPV. Because this is a single and autonomous project, make your decision based on the IRR.