Corporate Finance Npv Irr Essay

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Contents

1. Assignment Part A

Prepare the case, with recommendations to be presented to the Board of Directors of ProGen. Assess the viability of the project using the NPV, IRR, and Payback methods.

2. Assignment Part B

“The IRR rule is redundant as an investment criterion because the NPV rule always dominates. Discuss this statement giving examples where possible.

3. Conclusion

“The IRR rule is redundant as an investment criterion because the net present value (NPV) rule always dominates it.”

4. Bibliography

References

Assignment Part A

This report evaluates the viability for marketing and distribution of genetically …show more content…
5-year payback rule would mean that the firm accepts all projects that recover their initial outlay within 5 years. If internally use a 3 year payback this project would be rejected. This would a missed opportunity given the positive cash flow in years 4 and 5. Therefore NPV is £425m, which is a better measure. This result determines that in 4.8 years time with a discount rate 11%, the firm would have generated additional £425m of shareholder value.

IRR of 15% discount rate gives a net nil of discounted cash flow

IRR - Is a measure of the profitability of a project but not a true measure of the return of a T period project. An IRR of 15% does not mean that this will generate an annual return of 15%. IRR of 15% is the equivalent to the discount rate, which gives an NPV of zero.

If IRR is greater than cost of capital it adds shareholder value.

Project Investment Recommendations

The evaluation methods used (NPV, IRR and Payback) conclude that

This investment project could be viable and should be considered by the firm providing the

Firm can support a 5-year payback rule. This investment would require provisions to support the negative cash flow present in the first 3 years.

If this is acceptable then

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