Net Cash Flow Task 2 Coursework Example | Topics and Well Written Essays - 500 words

Net Cash Flow Task 2 - Coursework Example However, the Net Present Value is very low. There are two reasons why Person K should not invest in a project with such a low NPV. The first is that other projects are likely to be available in the market that can give a higher NPV. Investing in this project has an opportunity cost equal to the return obtainable from those projects. Secondly, such a low NPV would leave little room for risks, and would be extremely sensitive. For example, if the expected sales fall by 10%, the project might show a negative NPV. Hence it is not advisable to invest in this project. Answer: The IRR for the project is 13.31%, which is higher than the cost of capital by 1.31%. For reasons similar to those advanced in the case of recommendation based on NPV above, the recommendation is that Person K should not invest in this project a) Rationale for recommendation: The IRR for the project is 13.31%, which is just marginally higher than the cost of capital. If Person K had an unlimited amount of money to invest, this project would qualify for investment. However, in a situation where there is a limited amount of capital to be invested, the returns should be maximized, and investing in low yielding projects would deprive Person K of the opportunity to invest in alterative high yielding projects. Secondly, the sensitivity of the project to variations in the assumptions would be very high, and small changes in the assumption would upset the entire calculation. Answer: Internal Rate of Return is the rate at which the Net Present Value becomes equal to 0. Accounting Rate of Return is the average net income from the project divided by the investment. Conceptually the two figures are very different. Internal rate of Return considers the actual cash flows, including the initial investment, whereas Accounting Rate of Return considers the Profit for each period after charging depreciation on the assets procured with the initial investment. Secondly, Internal Rate of