Capital Budgeting if the Project Research Proposal

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Any discount rate lower will yield a positive net present value, up to $126,000.

Part II.

For capital budgeting decisions, NPV is a better metric. NPV and IRR are very similar in many respects, and they carry the same reliance on the same underlying assumptions about the underlying cash flows. Additionally, they both relate to the company's cost of capital. IRR is typically used as a go/no-go threshold, whereas NPV measures the raw cash flows.

Ultimately, for most companies they objective is to generate superior returns for their shareholders. What NPV does that IRR does not do is consider the cash return of the project. With limited funds to go around, management will typically need to decided between a variety of different projects. Some will be approved and others will not be approved. In order to meet the needs of the shareholders, management needs to approve the projects that contribute the most to the bottom line.

IRR can skew this decision.

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A project with a higher IRR does not necessarily generate more cash flow than one with a lower IRR. For a variety of reasons, the two projects can be mutually exclusive. In such a scenario, the firm would improve its return on investment, but at the expense of earnings per share. This runs counter to the needs of the shareholders, who wish to see their investment returns maximized in dollar form. As such, NPV is the better metric by which capital budgeting decisions are made. It incorporates all of the same components as IRR, but also includes information with respect to the size of the cash flows involved. That IRR does not….....

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