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The graph shows the NPV as a function of the discount rate. The NPV is positive only for discount rates that are less than 14%, the internal rate of return (IRR). Given the cost of capital of 10%, the project has a positive NPV of $100 million.
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ACFL1
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- IRR = 39%
-1,000,000 + 650,000 +650,000 +650,000 + 350,000
- IRR = 49%
- 2,000,000 + 1,000,000 +1,300,000 + 1,300,000 +1,000,000
- IRR = 43.5%
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In this case, there is more than one IRR, invalidating the IRR rule. If the opportunity cost of capital is either below 4.723% or above 19.619%, Star should make the investment.
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= NPV RC
Bath Students
Project
A B C D E
NPV
30 35 20 15 12
100 150 70 80 28
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Project
E A C B D
NPV
12 30 20 35 15
Headcount
Headcount PI
Cumulative requirement
28 100 70 150 80
28 128 198
Broken the budget
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Mats PI
So?
Now Moving on
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Illustrations using examples from B&DeM New project, units 100,000 pa at 260 per unit = 26 million Cost of production is 110 per unit = 11M Gross profit 15 million pa Operating expenses = 2.8 million pa 5 million to be spent on design and engineering 10 million on software 7.5 million equipment depreciated over 5 years on straight line basis
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The graph shows alternative price per unit and annual volume combinations that lead to an NPV of $5.0 million. Pricing strategies with combinations above this line will lead to a higher NPV and are superior.
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ACFL1
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