Capital Budgeting

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Title: Capital Budgeting
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Subject: Business
Date: December 12, 2007
Length: 9 / 2576
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Formula for the IRR is: IRR = R1 + (R2 + R1) ? NPV1 (NPV1 – NPV2) A discount rate estimated at 10% and 20% [pic] IRR = R1 + (R2 – R1) x NPV1 (NPV1 – NPV2) = 10 + (20 – 10) x ?0.657 ?0.6570 – (-?0.3047) = 10 + 6.57 0.9614 = 16.83 % To get a more accurate IRR, we narrow down the estimated rate to 16% and 17% [pic] IRR = 16 + (17 – 16) ? 0...
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By comparing these three IRR estimations, it was found that 16.48% (R1 = 16, R2 = 17) produces an NPV closest to zero. Hence, the IRR is 16.482%. The IRR decision rule is to accept an investment if the IRR is greater than the company’s target rate of return...
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