Superior Living for the Plant Construction Project, Essay

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Superior Living

For the plant construction project, we need to have a way to determine if this project is something we should do or not. There are a number of different ways the firms evaluate such projects, but the most common are the net present value (NPV), internal rate of return (IRR) and the modified internal rate of return (MIRR). Each of these is based on the concept of discounted cash flow. The incremental cash flows of the project are evaluated to determine whether or not there is a positive cash flow, on a time-adjusted (discounted) basis (Investopedia, 2012). In theory, if the project makes a positive contribution to the company, it should be accepted. In practice, companies face decisions between mutually exclusive options. Given our tight financing, that might be the case here. So the different projects that people want to have financed will need to be evaluated against each other and only the best options chosen.

Net present value (NPV) is simply a measure of whether the cash inflows are greater than the cash outflows.

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The cash flows associated with a project are discounted according to the company's cost of capital, and weighed against the cost of starting the project. Suppose our factory project costs $100 million to start, and generates income of $40 million per year for five years. If the company's cost of capital is 12%. The net present value of this project is $44.19 million, meaning that is the amount of wealth that the project adds to the firm. Because the NPV is above zero, the project would be undertaken. This NPV, however, would be compared to the NPVs of all mutually exclusive projects, so that the best project is undertaken.

The internal rate of return takes the NPV measurement and determines what the rate of return on the project is. If the rate of return on the project is greater than the cost of capital, then the project should be undertaken. Note that this is very similar to the NPV.….....

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