Week 5 discussion 1 – capital budgeting tools

For example: if you are considering two different investments with expected cash flows of $10,000 in year 1 and $20,000 in year 2 respectively. Taking into account a 10% discount rate, your NPV calculations would look like this:

Investment A = ($1000 x 1/1.1) + ($20000 x 1/1.12) = $14396

Investment B = ($1000 x 1/1.1) + ($20000 x 1/1.12) = $14753

In this case Investment B has a higher NPV than Investment A so it would be considered the more profitable option despite their equal long-term cash flows.

The Internal Rate of Return (IRR) is closely related to NPV analysis as it measures profitability by calculating the percentage rate of return on an investment based on its current market value and any future income or expenses associated with it. While both metrics focus on assessing long-term profitability from investments, IRR is often preferred since it simplifies decision making by providing an easily comparable metric when evaluating multiple investments side by side whereas NPV requires additional calculations such as discount rates in order to properly compare them against each other accurately.