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Excel: Relationship Between NPV and IRR

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1. Do calculation in EXCEL and MICROSOFT WORD - make sure able to see calculation in background of cell
2. Describe relationship between NPV and IRR
3. Give explanation for why A or B Corporation is picked

(See attached file for full problem description).

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In a 1,050-1,500-word memo, define, analyze, and interpret the answers to items (c) through (h). .
Present the rationale behind each item and why it supports your decision stated in item (i). Also, attempt to describe the relationship between NPV and IRR.

Several different procedures are available to analyze potential business investments. Some concepts are better than others when it comes to reliability but all provide enough information to get the general scope of the investment. The five procedures that provide useful information are the Net present Value (NPV), the Payback Rule, the Average Accounting Return (AAR), the Internal Rate of Return (IRR), and the Profitability Index (PI). These procedures will help rank the projects from the greatest investment to the worst.
First, the most important concept of evaluating these investments is the NPV. NPV is defined as the difference between an investment's market value and its cost. It is only a good investment if it makes money for the company so a positive NPV will be needed. The projects can be ranked from the most positive NPV to the lowest to determine profitability. This quantitative ranking method is the best to use due to its consideration of the time value of money and its more accurate breakdown of value.
COMMENTS: NPV is a discounted cash flow technique, which explicitly recognize the time value of money. It is defined as the difference between the present value of cash inflow and cash outflows.
In our case we will choose Corporation B as it has higher NPV of $40251 as compared to the Corporation A's NPV of $20979.
Second, the IRR is the next closest alternative to the NPV calculations; therefore it is next in line as far as a method to calculate for investments. The IRR is the discount rate that makes the NPV of an investment zero. An investment should be accepted if it is higher than the required return; if it is lower, the project is not acceptable. The IRR can be a problem if cash flows are not conventional or when in this case with multiple projects to compare, the IRR can be misleading and not provide the actual best investment. With ...

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The solution explains the relationship between NPV and IRR.

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See Also This Related BrainMass Solution

Compute and Analyze Critical Data Using Microsoft Excel Spreadsheet

I am thinking about aquiring another corperation.
I have two choices; the cost of each is $250,000.
I can not spend more than that, so acquiring both corperations is not an option.
The following is my critical data I have put togther for each:

Corperation A:
Revenues= 100K in year one, increasing by 10% each year
Expenses= 20k in year one, increasing by 15% each year
Depreciation Expense= 5K each year
Tax Rate= 25%
Discount Rate= 10%

Corperation B:
Revenues= 150K on year one, increasing by 8% each year
Expenses= 60K in year one, increasing by 10% each year
Depreciation Expense= 10K each year
Tax Rate= 25%
Discount Rate= 11%

I need to cumpute and analyze items (a) through (h) using a microsoft spreed sheet.
Could you please makesure all calculations can be seen in the background of the applicable spreedsheet cell, in other word leave an aduit trail so I can see how you arrived at your calculations.

a) A 5 year Projected Income Statement
b) A 5 year Projected Cash Flow
c) Net Present Value
d) Internal Rate of Return
e) Payback Period
f) Profitability Index
g) Discounted Payback Period
h) Modified Internal Rate of Return

Based on items (a) through (h), which company would you recommend?

In one or two pages could you define, analyze, and interpret your answers in items (c) through (h) with a rational behind each item and why it supports your decision in the company you recommended.

Describe the relationship between NPV and IRR.

Explain how you would analyze projects differently if corperation A & B had unequal projected years.

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