Discount Rate at Which the Research Proposal

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Often, the decision will come from a set of alternatives in which there is at least some mutual exclusivity. Thus, the decision-making criteria need to take into account the size of the investment in addition to its payoff. The internal rate of return is useful in helping to identify those investment opportunities that have the highest percentage payoff, but if a small investment opportunity is mutually exclusive with a larger opportunity that is more lucrative in real dollars but less lucrative on a percentage basis, the company may choose the smaller alternative.

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Under this scenario, the profit of the company would not be maximized.

Because net present value accounts not only for the percentage return but also the raw dollar figures involved, it provides management with more useful information upon which to base their capital budgeting decisions. Internal rate of return is a strong method, but it is limited because it only addresses one component of the capital budgeting decision. Net present value, therefore, is more complete and thus is….....

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