# Internal rate of return

Question 1

• Describe how net present value is used in the financial decision making process.
• Explain the disadvantages of using the payback method.
• Compare and contrast the internal rate of return (IRR) method from the net present value method (NPV)
• Review the financial considerations a company should make before investing in a project.
• Understand how net working capital, depreciation and interest influence the decision to buy or not to buy.
• Explain how inflation and interest rates affect the capital budgeting process.
• Describe how the options to expand or abandon a project are integrated in the capital budgeting process.
• Explain how decision trees are used to value investment alternatives

Question 2

Case Study Attached

This assignment allows students to work with issues related to the cost of capital. In addition, students will practice calculations related to capital structure and use them in making financial decisions.Required Activities:

1. Determine the weighted average cost of capital based on using retained earnings in the capital structure. Note: The percentage composition in the capital structure for bonds, preferred stock, and common equity should be based on the current capital structure of long-term financing as shown in Figure 1 above (it adds up to \$18 million). Common equity will represent 60 percent of financing throughout this case. Use Rollins Instruments data to calculate the cost of preferred stock and debt. Show your work on your assignment document.

2. Recompute the weighted average cost of capital based on using new common stock in the capital structure. Note: The weights remain the same, only common equity is now supplied by new common stock, rather than by retained earnings. After how much new financing will this increase in the cost of capital take place? Determine this by dividing retained earnings by the percent of common equity in the capital structure. Show your work on your assignment document.

3. Write a 1 page summary that provides the following : A. Differentiate between the methods used in question 1 above and those used in question 2 above as it relates to the results. B. Provide your opinion on which method you would suggest and why, based on your findings. C. Add this summary below your answers to 1 and 2 above on your assignment file.

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