Principles of Managerial Finance
Principles of Managerial Finance
17th Edition
ISBN: 9781323419656
Author: Gitman
Publisher: PEARSON
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Chapter 10.4, Problem 10.8RQ
Summary Introduction

To discuss:

The internal rate of return (IRR) on an investment and the method of computing IRR.

Introduction:

Internal Rate of Return is a measure used in the capital budgeting which estimates the profitability of potential investments. IRR is computed as a discount rate that makes the net present value of all cash flows from an investment as zero.

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Scenario one: Under what circumstances would it be appropriate for a firm to use different cost of capital for its different operating divisions? If the overall firm WACC was used as the hurdle rate for all divisions, would the riskier division or the more conservative divisions tend to get most of the investment projects? Why? If you were to try to estimate the appropriate cost of capital for different divisions, what problems might you encounter? What are two techniques you could use to develop a rough estimate for each division’s cost of capital?

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Principles of Managerial Finance

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