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I have a few discussion questions I need answered. with no plagiarism, Sources sited and at lest 150 words each.

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1

Fundamentals of Corporate Finance

Ch.9

What are the differences in the calculation of net present value and internal rate of return?

The net present value is a method of evaluating the profitability of a proposed investment by

discounting the stream of anticipated cash flows of the proposed investment to their present

value, while the internal rate of return assesses the profitability of a project by calculating the

percentage rate of return that will result to a net present value of zero for those cash flows.

Therefore, the major differences in the two calculations are as follows;

•

•

•

The calculation of the net present value results in a dollar value that will be produced by

a project while the internal rate of return results to a percentage return that a project

should create.

NPV focuses on surpluses of a project while IRR concentrates on the break-even level of

a project’s cash flow.

The discount rate and cash flows used in the NPV method is very hard to derive. This

difficulty is not experienced in IRR calculations since discount rate is the rate of return

that is derived from the cash flows or one that results to a zero NPV (Drew, Christensen

& Bianchi, 2013).

What are the various tools for analyzing capital investments? What are the decision

criteria, advantages and disadvantages of each? Which one would you recommend that

your boss use in analyzing a new business opportunity? Why?

Net present value

It as a tool that evaluates an investment by discounting its future cash flows to a current value

through a predetermined the decision criteria for this method is to accept a project if its net

present value is positive and reject if negative. The advantage of NPV is that it has no serious

flaws in its decision criteria. The drawback of this tool is that it is very difficult to come up with

the discount rate and cash flows used in this method (Ross, Westerfield & Jordan, 2008).

Internal Rate of Return

When assessing an investment, this tool calculates the rate that will discount an investments’

NPV to zero. The criteria for this tool is to accept a project when its IRR exceeds the required

return and reject if IRR is less than the required return. The advantage is that IRR is a simple

method to use esp...

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