### Investment Decision Analysis: IRR and NPV Evaluation **Problem Statement:** 4. Your factory has been offered a contract to produce a part for a new printer. The contract would last for three years, and your cash flows from the contract would be $5.05 million per year. Your upfront setup costs to be ready to produce the part would be $7.93 million. Your discount rate for this contract is 8.4%. #### Questions: a. What is the IRR? b. The NPV is $4.99 million, which is positive, so the NPV rule says to accept the project. Does the IRR rule agree with the NPV rule? **Solution Explanation:** For understanding and educational purposes, we need to determine the Internal Rate of Return (IRR) and compare it with the Net Present Value (NPV) analysis provided. **Step-by-Step Solution:** 1. **Calculate the IRR:** - The IRR is the rate at which the net present value (NPV) of all the cash flows (both inflows and outflows) from a project or investment equals zero. - In this scenario, the cash flows are: - Initial outflow: $7.93 million - Annual inflows: $5.05 million per year for three years. - Using financial calculator or software (such as Excel), determine the IRR. The IRR is ________________ % (Round to two decimal places). 2. **Verify the NPV Rule Agreement:** - Given the NPV calculation results in $4.99 million (positive), the project should be accepted according to the NPV rule. - To check if the IRR rule agrees with the NPV rule, compare the IRR obtained to the discount rate (8.4%). - If the IRR is greater than the discount rate, the IRR rule also suggests accepting the project. The IRR rule (1) ________________ with the NPV rule. (1) Select the appropriate option: - doesn’t agree - agrees **Conclusion:** By following these steps, one can determine the IRR and check if it aligns with the recommendation given by the NPV rule. This approach ensures comprehensive investment decision analysis. **Note:** Understanding both IRR and NPV helps in making well-rounded decisions regarding investments and financial projects,
### Investment Decision Analysis: IRR and NPV Evaluation **Problem Statement:** 4. Your factory has been offered a contract to produce a part for a new printer. The contract would last for three years, and your cash flows from the contract would be $5.05 million per year. Your upfront setup costs to be ready to produce the part would be $7.93 million. Your discount rate for this contract is 8.4%. #### Questions: a. What is the IRR? b. The NPV is $4.99 million, which is positive, so the NPV rule says to accept the project. Does the IRR rule agree with the NPV rule? **Solution Explanation:** For understanding and educational purposes, we need to determine the Internal Rate of Return (IRR) and compare it with the Net Present Value (NPV) analysis provided. **Step-by-Step Solution:** 1. **Calculate the IRR:** - The IRR is the rate at which the net present value (NPV) of all the cash flows (both inflows and outflows) from a project or investment equals zero. - In this scenario, the cash flows are: - Initial outflow: $7.93 million - Annual inflows: $5.05 million per year for three years. - Using financial calculator or software (such as Excel), determine the IRR. The IRR is ________________ % (Round to two decimal places). 2. **Verify the NPV Rule Agreement:** - Given the NPV calculation results in $4.99 million (positive), the project should be accepted according to the NPV rule. - To check if the IRR rule agrees with the NPV rule, compare the IRR obtained to the discount rate (8.4%). - If the IRR is greater than the discount rate, the IRR rule also suggests accepting the project. The IRR rule (1) ________________ with the NPV rule. (1) Select the appropriate option: - doesn’t agree - agrees **Conclusion:** By following these steps, one can determine the IRR and check if it aligns with the recommendation given by the NPV rule. This approach ensures comprehensive investment decision analysis. **Note:** Understanding both IRR and NPV helps in making well-rounded decisions regarding investments and financial projects,
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
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Transcribed Image Text:### Investment Decision Analysis: IRR and NPV Evaluation
**Problem Statement:**
4. Your factory has been offered a contract to produce a part for a new printer. The contract would last for three years, and your cash flows from the contract would be $5.05 million per year. Your upfront setup costs to be ready to produce the part would be $7.93 million. Your discount rate for this contract is 8.4%.
#### Questions:
a. What is the IRR?
b. The NPV is $4.99 million, which is positive, so the NPV rule says to accept the project. Does the IRR rule agree with the NPV rule?
**Solution Explanation:**
For understanding and educational purposes, we need to determine the Internal Rate of Return (IRR) and compare it with the Net Present Value (NPV) analysis provided.
**Step-by-Step Solution:**
1. **Calculate the IRR:**
- The IRR is the rate at which the net present value (NPV) of all the cash flows (both inflows and outflows) from a project or investment equals zero.
- In this scenario, the cash flows are:
- Initial outflow: $7.93 million
- Annual inflows: $5.05 million per year for three years.
- Using financial calculator or software (such as Excel), determine the IRR.
The IRR is ________________ % (Round to two decimal places).
2. **Verify the NPV Rule Agreement:**
- Given the NPV calculation results in $4.99 million (positive), the project should be accepted according to the NPV rule.
- To check if the IRR rule agrees with the NPV rule, compare the IRR obtained to the discount rate (8.4%).
- If the IRR is greater than the discount rate, the IRR rule also suggests accepting the project.
The IRR rule (1) ________________ with the NPV rule.
(1) Select the appropriate option:
- doesn’t agree
- agrees
**Conclusion:**
By following these steps, one can determine the IRR and check if it aligns with the recommendation given by the NPV rule. This approach ensures comprehensive investment decision analysis.
**Note:**
Understanding both IRR and NPV helps in making well-rounded decisions regarding investments and financial projects,
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