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This document discusses the internal rate of return (IRR) method for evaluating investment projects. It defines IRR as the discount rate that makes the net present value equal to zero. Projects with an IRR higher than the required return would be accepted. IRR is generally reliable for conventional cash flows but can produce unreliable results for non-conventional cash flows or when comparing mutually exclusive projects. The document also notes some advantages and disadvantages of using IRR, such as its intuitive appeal but potential to produce multiple answers or inability to rank mutually exclusive projects.
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FIN534 Week 6 Scenario Script How to use the Different Capital Bu.docx
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Slide #
Scene/Interaction
Narration
Slide 1
Intro Slide
Slide 2
Scene 2
· In Don’s office
· Maybe Fitness Olympic banner
· Situation room
· End of scene
Don: Hi Linda, how was your workout? I knew I would see you exercising before work.
Linda: That is right Don. Our annual Fitness Olympics challenge is coming up and I want to be in shape for it.
Don: I forgot about the company Fitness Olympics.
Linda: Well, I did not forget. Last year our department just missed out on the top honors. This year we are planning on being the winning department. I may even try to recruit our intern!
Don: Great attitude, Linda.
Don: Before the Fitness Olympics, we still have a lot of work to do concerning this expansion project and whether or not we should go with it. Things are starting to move quickly. Recently, I heard from Joe and he wants us to do some capital budgeting analyses on the project. This analysis may be our make or break analysis for the project so we really need to be detailed.
Linda: Okay Don. The intern and I are right on it. I plan on meeting the intern in the “Situation Room”. We dubbed the conference room that name as we are constantly making informed decisions.
Slide 3
Scene 3
· Linda in conference room
·
· Go to next slide
Linda: We have our hands full. The project is getting close to decision making time. Joe and Don want us to analyze the proposed expansion project from a capital budgeting standpoint. Currently, we have completed many internal analyses on TFC. Now, we must look at the viability of the expansion project. Capital budgeting does just that. At the end of it, we should have a better idea of what our recommendation would be.
Linda: Capital budgeting can be done whenever there is an initiative to invest in assets for the long term. Our project is doing just that. We want to be confident in our decision as this project is for the long term and is costly. Don is going to be joining us with the expected cost of the project.
Slide 4
Scene 4
· Don in conference room with papers in hand?
· Show on the papers - seven hundred fifty million dollars
· Go to next slide
Don: Hello all. With this expansion project we will double in asset size. But it comes with a price. The Accounting Department told us that the projected price to expand out West is seven hundred fifty million dollars. I also have the projected cash flow numbers. Now, I need the both of you to determine if we should proceed with the expansion. To do so you will need to use many capital budgeting techniques to arrive at a highly confident decision. Good luck! The faith of this expansion and the future success of TFC depend on your analysis.
Linda: Don, the Intern and I will begin working on this now!
Slide 5
Scene 5
· Linda In conference room (Don not in room)
· Net Present Value
· WACC =10.92%
· G ...
FIN534 Week 6 Scenario Script How to use the Different Capital Bu.docx
FIN534 Week 6 Scenario Script: How to use the Different Capital Budgeting Methods, and Identifying Relevant Cash Flows
Slide #
Scene/Interaction
Narration
Slide 1
Intro Slide
Slide 2
Scene 2
· In Don’s office
· Maybe Fitness Olympic banner
· Situation room
· End of scene
Don: Hi Linda, how was your workout? I knew I would see you exercising before work.
Linda: That is right Don. Our annual Fitness Olympics challenge is coming up and I want to be in shape for it.
Don: I forgot about the company Fitness Olympics.
Linda: Well, I did not forget. Last year our department just missed out on the top honors. This year we are planning on being the winning department. I may even try to recruit our intern!
Don: Great attitude, Linda.
Don: Before the Fitness Olympics, we still have a lot of work to do concerning this expansion project and whether or not we should go with it. Things are starting to move quickly. Recently, I heard from Joe and he wants us to do some capital budgeting analyses on the project. This analysis may be our make or break analysis for the project so we really need to be detailed.
Linda: Okay Don. The intern and I are right on it. I plan on meeting the intern in the “Situation Room”. We dubbed the conference room that name as we are constantly making informed decisions.
Slide 3
Scene 3
· Linda in conference room
·
· Go to next slide
Linda: We have our hands full. The project is getting close to decision making time. Joe and Don want us to analyze the proposed expansion project from a capital budgeting standpoint. Currently, we have completed many internal analyses on TFC. Now, we must look at the viability of the expansion project. Capital budgeting does just that. At the end of it, we should have a better idea of what our recommendation would be.
Linda: Capital budgeting can be done whenever there is an initiative to invest in assets for the long term. Our project is doing just that. We want to be confident in our decision as this project is for the long term and is costly. Don is going to be joining us with the expected cost of the project.
Slide 4
Scene 4
· Don in conference room with papers in hand?
· Show on the papers - seven hundred fifty million dollars
· Go to next slide
Don: Hello all. With this expansion project we will double in asset size. But it comes with a price. The Accounting Department told us that the projected price to expand out West is seven hundred fifty million dollars. I also have the projected cash flow numbers. Now, I need the both of you to determine if we should proceed with the expansion. To do so you will need to use many capital budgeting techniques to arrive at a highly confident decision. Good luck! The faith of this expansion and the future success of TFC depend on your analysis.
Linda: Don, the Intern and I will begin working on this now!
Slide 5
Scene 5
· Linda In conference room (Don not in room)
· Net Present Value
· WACC =10.92%
· G ...
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Slide #
Scene/Interaction
Narration
Slide 1
Intro Slide
Slide 2
Scene 2
· In Don’s office
· Maybe Fitness Olympic banner
· Situation room
· End of scene
Don: Hi Linda, how was your workout? I knew I would see you exercising before work.
Linda: That is right Don. Our annual Fitness Olympics challenge is coming up and I want to be in shape for it.
Don: I forgot about the company Fitness Olympics.
Linda: Well, I did not forget. Last year our department just missed out on the top honors. This year we are planning on being the winning department. I may even try to recruit our intern!
Don: Great attitude, Linda.
Don: Before the Fitness Olympics, we still have a lot of work to do concerning this expansion project and whether or not we should go with it. Things are starting to move quickly. Recently, I heard from Joe and he wants us to do some capital budgeting analyses on the project. This analysis may be our make or break analysis for the project so we really need to be detailed.
Linda: Okay Don. The intern and I are right on it. I plan on meeting the intern in the “Situation Room”. We dubbed the conference room that name as we are constantly making informed decisions.
Slide 3
Scene 3
· Linda in conference room
·
· Go to next slide
Linda: We have our hands full. The project is getting close to decision making time. Joe and Don want us to analyze the proposed expansion project from a capital budgeting standpoint. Currently, we have completed many internal analyses on TFC. Now, we must look at the viability of the expansion project. Capital budgeting does just that. At the end of it, we should have a better idea of what our recommendation would be.
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Slide 4
Scene 4
· Don in conference room with papers in hand?
· Show on the papers - seven hundred fifty million dollars
· Go to next slide
Don: Hello all. With this expansion project we will double in asset size. But it comes with a price. The Accounting Department told us that the projected price to expand out West is seven hundred fifty million dollars. I also have the projected cash flow numbers. Now, I need the both of you to determine if we should proceed with the expansion. To do so you will need to use many capital budgeting techniques to arrive at a highly confident decision. Good luck! The faith of this expansion and the future success of TFC depend on your analysis.
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Slide 5
Scene 5
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Slide #
Scene/Interaction
Narration
Slide 1
Intro Slide
Slide 2
Scene 2
· In Don’s office
· Maybe Fitness Olympic banner
· Situation room
· End of scene
Don: Hi Linda, how was your workout? I knew I would see you exercising before work.
Linda: That is right Don. Our annual Fitness Olympics challenge is coming up and I want to be in shape for it.
Don: I forgot about the company Fitness Olympics.
Linda: Well, I did not forget. Last year our department just missed out on the top honors. This year we are planning on being the winning department. I may even try to recruit our intern!
Don: Great attitude, Linda.
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Slide 3
Scene 3
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·
· Go to next slide
Linda: We have our hands full. The project is getting close to decision making time. Joe and Don want us to analyze the proposed expansion project from a capital budgeting standpoint. Currently, we have completed many internal analyses on TFC. Now, we must look at the viability of the expansion project. Capital budgeting does just that. At the end of it, we should have a better idea of what our recommendation would be.
Linda: Capital budgeting can be done whenever there is an initiative to invest in assets for the long term. Our project is doing just that. We want to be confident in our decision as this project is for the long term and is costly. Don is going to be joining us with the expected cost of the project.
Slide 4
Scene 4
· Don in conference room with papers in hand?
· Show on the papers - seven hundred fifty million dollars
· Go to next slide
Don: Hello all. With this expansion project we will double in asset size. But it comes with a price. The Accounting Department told us that the projected price to expand out West is seven hundred fifty million dollars. I also have the projected cash flow numbers. Now, I need the both of you to determine if we should proceed with the expansion. To do so you will need to use many capital budgeting techniques to arrive at a highly confident decision. Good luck! The faith of this expansion and the future success of TFC depend on your analysis.
Linda: Don, the Intern and I will begin working on this now!
Slide 5
Scene 5
· Linda In conference room (Don not in room)
· Net Present Value
· WACC =10.92%
· G ...
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Irr suci
- 1. Internal Rate Of Return By : Suci Alwahyuni Carles
- 2. I am Suci Alwahyuni Carles UIN Sultan Syarif Kasim Riau Sistem Informasi 2015 IG: sucialca E-mail : sucialca@gmail.com I 2 Hello!
- 3. IRR Discount rate that makes NPV = 0 Accept if IRR > required return Same decision as NPV with conventional cash flows Unreliable with: Non-conventional cash flows Mutually exclusive projects
- 4. 4 Multiples IRR ༝ Descartes Rule of Signs ༝ Polynomial of degree n→n roots ○ When you solve for IRR you are solving for the root of an equation ○ 1 real root per sign change ○ Rest = imaginary (i2 = -1) 0 )IRR1( CFn 0t t t
- 5. ༝ Does the IRR rule: ○ Account for the time value of money? ○ Account for the risk of the cash flows? ○ Provide an indication about the increase in value? ○ Permit project ranking? ༝ Should we consider the IRR rule for our primary decision criteria? 5 Decisions Criteria Test IRR
- 6. ༝ Preferred by executives ○ Intuitively appealing ○ Easy to communicate the value of a project ༝ If the IRR is high enough, may not need to estimate a required return ༝ Considers all cash flows ༝ Considers time value of money ༝ Provides indication of risk 6 IRR Advantages:
- 7. ༝Can produce multiple answers ༝Cannot rank mutually exclusive projects ༝Reinvestment assumption flawed 7 IRR Disadvantages:
- 8. Thanks! 8