Bruin, Incorporated, has identified the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) 0 1 2 3 -$40,000 19,300 14,800 12,300 9,300 a. What is the IRR for Project A? -$ 40,000 5,700 12,200 18,700 22,700 4
Net Present Value
Net present value is the most important concept of finance. It is used to evaluate the investment and financing decisions that involve cash flows occurring over multiple periods. The difference between the present value of cash inflow and cash outflow is termed as net present value (NPV). It is used for capital budgeting and investment planning. It is also used to compare similar investment alternatives.
Investment Decision
The term investment refers to allocating money with the intention of getting positive returns in the future period. For example, an asset would be acquired with the motive of generating income by selling the asset when there is a price increase.
Factors That Complicate Capital Investment Analysis
Capital investment analysis is a way of the budgeting process that companies and the government use to evaluate the profitability of the investment that has been done for the long term. This can include the evaluation of fixed assets such as machinery, equipment, etc.
Capital Budgeting
Capital budgeting is a decision-making process whereby long-term investments is evaluated and selected based on whether such investment is worth pursuing in future or not. It plays an important role in financial decision-making as it impacts the profitability of the business in the long term. The benefits of capital budgeting may be in the form of increased revenue or reduction in cost. The capital budgeting decisions include replacing or rebuilding of the fixed assets, addition of an asset. These long-term investment decisions involve a large number of funds and are irreversible because the market for the second-hand asset may be difficult to find and will have an effect over long-time spam. A right decision can yield favorable returns on the other hand a wrong decision may have an effect on the sustainability of the firm. Capital budgeting helps businesses to understand risks that are involved in undertaking capital investment. It also enables them to choose the option which generates the best return by applying the various capital budgeting techniques.
![**Project Evaluation: Cash Flow Analysis**
Bruin, Incorporated has identified the following two mutually exclusive projects:
| Year | Cash Flow (A) | Cash Flow (B) |
|------|---------------|---------------|
| 0 | -$40,000 | -$40,000 |
| 1 | $19,300 | $5,700 |
| 2 | $14,800 | $12,200 |
| 3 | $12,300 | $18,700 |
| 4 | $9,300 | $22,700 |
- **[a] What is the IRR for Project A?**
- **IRR:** [Input Box]
In this exercise, students will evaluate the internal rate of return (IRR) for Project A to determine its potential profitability compared to Project B. IRR is a crucial metric used in capital budgeting to assess the viability and expected financial returns of projects.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fbeb4c4dc-f42f-4f8d-b673-9691cfe8ff0a%2F15ebcbf7-a7b6-443a-8bf6-a08d06142d54%2Fmr5cmc_processed.jpeg&w=3840&q=75)
![**Internal Rate of Return (IRR) and Net Present Value (NPV) Calculations**
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**b. What is the IRR for Project B?**
- **IRR:** [Input Field]
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**c. If the required return is 8 percent, what is the NPV for Project A?**
- **NPV:** [Input Field]
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**Explanation:**
This section provides input fields to calculate two financial metrics:
1. **IRR (Internal Rate of Return):** This metric measures the profitability of potential investments. The IRR is the discount rate that makes the net present value (NPV) of the cash flows from a project equal to zero. To find the IRR, you would typically use financial software or a calculator to solve for the rate in the present value equation.
2. **NPV (Net Present Value):** This value shows the difference between the present value of cash inflows and outflows over a period of time. For Project A, with a required return of 8%, you would enter the associated cash flow data into an NPV formula or calculator to determine if the project meets the desired return rate.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fbeb4c4dc-f42f-4f8d-b673-9691cfe8ff0a%2F15ebcbf7-a7b6-443a-8bf6-a08d06142d54%2F4d4daps_processed.jpeg&w=3840&q=75)
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