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Pearson Education Management Accounting for Decision Makers_9

Tham khảo tài liệu 'pearson education management accounting for decision makers_9', tài chính - ngân hàng, kế toán - kiểm toán phục vụ nhu cầu học tập, nghiên cứu và làm việc hiệu quả | 280 CHAPTER 8 MAKING CAPITAL INVESTMENT DECISIONS In increasing the discount rate from 20 per cent to 30 per cent we have reduced the NPV from 24 190 positive to 1 880 negative . Since the IRR is the discount rate that will give us an NPV of exactly zero we can conclude that the IRR of Billingsgate Battery Company s machine project is very slightly below 30 per cent. Further trials could lead us to the exact rate but there is probably not much point given the likely inaccuracy of the cash flow estimates. It is probably good enough for practical purposes to say that the IRR is about 30 per cent. The relationship between the NPV method discussed earlier and the IRR is shown graphically in Figure 8.4 using the information relating to the Billingsgate Battery Company. If the discount rate were zero the NPV would be the sum of the net cash flows. In other words no account would be taken of the time value of money. However if we assume increasing discount rates there is a corresponding decrease in the NPV of the project. When the NPV line crosses the horizontal axis there will be a zero NPV and the point where it crosses is the IRR. We can see that where the discount rate is zero the NPV will be the sum of the net cash flows. In other words no account is taken of the time value of money. However as the discount rate increases there is a corresponding decrease in the NPV of the project. When the NPV line crosses the horizontal axis there will be a zero NPV and that represents the IRR. Activity 8.15 What is the internal rate of return of the Chaotic Industries project from Activity 8.2 You should use the discount table on pp. 521-522. Hint Remember that you already know the NPV of this project at 15 per cent from Activity 8.12 . Since we know that at a 15 per cent discount rate the NPV is a relatively large negative figure our next trial is using a lower discount rate say 10 per cent INTERNAL RATE OF RETURN IRR 281 Time Cash flows 000 Discount factor 10 - from the table .