Hey guys I need assistance with the commercial operation subject for my class. Thanks everyone!
1. When computing Net Present Value or analyzing Internal Rate of Return…is it most appropriate to use the singular bonus rate? Why or Why not.
2. Also, should the bonus rate take in to the comment geographical aspects, as well as place of the project?
3. What have been the pros/cons of regulating the singular bonus rate for an complete corporation?
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1. Internal Rate of Return will give you the discount rate that makes the NPV of a project = 0.(technically their are flaws in the model, its mathematically possible to return an IRR of 0, also if there is more than one negative cash flow IRR can return x IRR’s for x cash flow changes (its then an X degree polynomial w. X possible answers)) There is no definitive answer as to whether or not you should use multiple discount rates, i would argue that if you can reasonably figure different discount rates your NPV will be more accurate, but the calculation more tedious.
2. Sure if the differences will affect a project.
3. Most corporations will have a single discount rate which they will modify based on the risk of the project (average risk project will get the average base discount rate, more dangerous will require a higher rate, less risky a lower rate) and how it will be capitalized(most frequently calculated using WACC)