TB MC Qu. 09-51 Based on Lab 9-4 Excel Evaluating Investments Using...

Based on Lab 9-4 Excel Evaluating Investments Using IRR, and given the results below, which investment should the company make if they use IRR to evaluate expected performance of each investment?

Question

TB MC Qu. 09-51 Based on Lab 9-4 Excel Evaluating Investments Using...

Based on Lab 9-4 Excel Evaluating Investments Using IRR, and given the results below, which investment should the company make if they use IRR to evaluate expected performance of each investment?

BlackTom AI · Accepted Answer

We need to determine which investment to choose when evaluating with IRR based on the results provided.
Option analysis:
Option 1: Investment 1. The IRR listed for this option is 29.0%. This is the highest IRR among the four investments, meaning it would, under the IRR decision rule, be the most attractive option provided the IRR exceeds the required return or hurdle rate.
Option 2: Investment 2. The IRR shown is 22.7%. While this may be acceptable, it is clearly lower than Investment 1’s IRR, making it less preferable if we are seeking the maximum IRR.
Option 3: Investment 4. The IRR for this option is 27.3%. This is high, but still below Investment 1’s 29.0%, so it would be ranked behind Investment 1 under the IRR criterion.
Option 4: Investment 3. The IRR here is 23.7%. This is the second-lowest among the options and is not as favorable as Investment 1, which has the top IRR.
Overall reasoning: When using IRR to evaluate projects, the standard approach is to select the project with the highest IRR, assuming all other factors like size, timing, and capital constraints align with the investment policy. In this set, Investment 1 offers the greatest percentage return on invested capital according to the IRR figures, which typically drives the decision in favor of that option. Conversely, the other investments show lower IRRs, indicating less potential for internal return relative to the top option. Keep in mind that IRR alone is not sufficient in all situations; it should be considered alongside scale, duration, and cash flow patterns to avoid misinterpretation, but within the given results, Investment 1 stands out on the IRR metric.

TB MC Qu. 09-51 Based on Lab 9-4 Excel Evaluating Investments Using... Based on Lab 9-4 Excel Evaluating Investments Using IRR, and given the results below, which investment should the company make if they use IRR to evaluate expected performance of each investment?

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