Futronics Case Simulation Solution

The Conch Republic is an organization which produces reputable electronics is seeking to advance one of their current production lines to stay abreast to changing technology. The company is seeking to introduce a new smart phone with the hopes of boosting the company’s revenue and reputation as a smart phone producer. As a person hired to assess the financial undertaking of Conch Republic an overview of the projects planned expense must be generated. However, in order to accomplish this task a capital investment analysis must be conducted in order to determine the projects viability. This will be done by analyzing several things. Those things that must be understood are the projects payback period, the net present value (NPV), internal

Net Present Value (NPV) is defined as the difference between the present value of cash inflows and the preset value of cash flows ("Net Present Value (NPV) Definition | Investopedia," n.d.) Businesses use the NPV in capital budgeting to determine if a project is cost-effective, a positive net present value means it was a positive investment and a negative net present value means the business lost money on the transaction. An example of using the formula of NPV in a case problem from the finance text book in chapter 13.

Investment no. 6 does only cover the cost of capital. Investment no. 2 does not even cover the cost of capital. An analyst would use NPV if the company has unlimited capital resources.

The internal rate of return (IRR) is a rate of return used in capital budgeting to measure and compare the profitability of investments. Generally speaking, the higher a project 's internal rate of return is, the more desirable it’s to undertake the project. As such, IRR can be used to rank several prospective projects a firm is considering. The project with the highest IRR would probably be considered the best and undertaken first. IRR is sometimes referred to as economic rate of return (ERR) or simply the rate of return (ROR). In theory should companies undertake all projects or investments available with IRRs that exceed the cost of capital.

The internal rate of return refers to the rate which equates the present value of cash inflows and present value of cash outflows. In other words it is the rate at which net present value of the investment is zero. If the net present value is positive, a higher discount rate may be used to bring it down to equalize the discount cash inflows and vice versa. That’s why internal rate is defined as the breakeven financing rate for the project.

As such, IRR can be used to rank several prospective projects a firm is considering. Assuming all other factors are equal among the various projects, the project with the highest IRR would probably be considered the best and undertaken first ("Internal Rate Of Return - Irr", 2014).” When looking at both companies discount rates, they are within 1% of one another. The higher the discount rates the better the profit for that particular company. Corporation A has a discount rate of 10%, while Corporation B has a discount rate of 11%. Generally speaking, the higher the discount rate the more profitable that company will become.

The internal rate of return (IRR) is the rate of return the project is expected to earn, and the higher the number, the higher expected return on investment (Keown et al., 2014). Corporation A’s IRR is 13.052%, whereas Corporation B’s IRR is 16.941%. Corporation B’s expected IRR is 3.889% higher than Corporation A.

A net present value calculation is based on the principle that future cash flows are not worth as much as present day cash flows, because inflation devalues those future flows (Investopedia, 2012). This implies that there are a number of factors that influence the NPV analysis. For a given project say a hypothetical new factory many different factors will need to be taken into consideration.

The internal rate of return uses the present value concepts as well as establishing the interest yield of proposed capital budget inflows is the equivalent of the investment project that has a net present value of zero and the present value of net cash

The internal rate of return (IRR) is a rate of return used in capital budgeting to measure and compare the profitability of investments. It will be used in this report to consider the expected return rate of the project in percentage terms rather than in pounds sterling (£).

A disadvantage of using the internal rate of return is that it does not consider the project size when comparing projects. Cash flows are simply compared to the amount of capital outlay generating those cash flows. This can be troublesome when two projects require a significantly different amount of capital outlay, but the smaller project returns a higher internal rate of return. Also, it only concerns itself with the projected cash flows generated by a capital injection and ignores the potential future costs that may affect profit. If management is considering an investment in

One shortcoming of the IRR method is that it is commonly misunderstood to convey the actual annual profitability of an investment. However, this is not the case because intermediate cash flows are almost never reinvested at the project 's IRR; and, therefore, the actual rate of return is almost certainly going to be lower. Accordingly, a measure called Modified Internal Rate of Return (MIRR) is often used.

Internal rate of return (IRR) is rate of return that a firm expects to earn if it selects the project and holds it for its economic life. That rate of return is the discount rate that will make the NPV equal zero. This discount rate can be determined with a financial calculator, excel or trial and error. Once this rate is determined, it is then compared to a “hurdle rate” established by the firm. The “hurdle rate” should be set “at a level that reflects market returns on investments that are just as risky as the project under consideration” (Smart, Megginson & Gitman, 2004, pg. 238). The “hurdle rate” is the discount rate in most cases.

Net present value (NPV), also called net present worth (NPW), is an approach to evaluating investments that assesses the difference between all the revenue the investment can be expected to achieve over its whole life and all the costs involved, taking inflation into consideration inflation and discounting both future costs and revenue at an appropriate rate. It can be challenging to calculate NPV because it is not always clear what discount rates should be used.

Internal rate of return (IRR) is the discount rate that makes NPV equal to zero. It is also called the time-adjusted rate of return.