Learning Objectives:
This particular Graded Discussion Board (GDB) will help the students understand:
- · The concepts regarding two important capital budgeting techniques i.e. Internal Rate of Return (IRR) and Average Accounting Return (AAR).
- · The analytical application of said techniques according to the provided information in a given scenario.
- · The technical difference between the said important techniques.
Case:
Creative Company (Private) Limited has been operating in the field of financial consultancy business for last 25 years. It has become a well-known company due to its efficient and well-educated management. One of the financial experts of the company has recently left the company due to some unknown reasons. HR Department is now searching for a new financial expert who should have special expertise in the field of project evaluation as the company has to deal with the project evaluations for its clients on regular basis. After advertising the said vacancy, the company is now going through the recruiting process and the short listing has almost been done for the post. The interviews have been scheduled in the coming week. One of the HR managers suggests that the financial skills regarding project evaluation should be tested by having a discussion on two of the capital budgeting techniques i.e. IRR and AAR. On the day of interview, the interviewees have been provided with the following details about three projects:
|
Years |
Project A |
Project B |
Project C |
|
0 |
(Rs. 100,000) |
(Rs. 100,000) |
(Rs. 100,000) |
|
1 |
Rs. 25,000 |
Rs. 15,000 |
0 |
|
2 |
25,000 |
20,000 |
0 |
|
3 |
25,000 |
25,000 |
0 |
|
4 |
25,000 |
30,000 |
0 |
|
5 |
25,000 |
35,000 |
Rs. 125,000 |
|
Depreciation (per year) |
Rs. 5,000 |
Rs. 5,000 |
Rs. 5,000 |
|
Net Profit |
Rs. 100,000 |
Rs. 100,000 |
Rs. 100,000 |
|
IRR |
7.93 % |
6.91% |
4.56% |
|
ARR |
20.0 % |
20.0 % |
20.0 % |
Required:
How would you respond to the following questions during the interview if you are one of the potential candidates for the said post?
-
Why IRR (Internal Rate of Return) is different for all three projects?
-
Why AAR (Average Accounting Return) is same for all three projects?
-
Which of the techniques is better to use in order to select the project in this particular scenario and why? Explain with rationale.
Important Instructions:
1. Your discussion comments must be based on logical facts.
2. Your comments should be brief and to-the-point. Avoid unnecessary details.
3. The GDB will remain open for 3 days or 72 hours (excluding weekend) –OR– 5 days or 120 hours (including weekend)
4. Do not copy or exchange your comments with other students. Two identical / copied comments will be marked Zero (0).
5. Obnoxious or ignoble comments should be strictly avoided.
6. Questions / queries related to the content of the Discussion Board, which may be posted by the students on MDB or via e-mail, will not be replied till the due date is over.
Ø For Detailed Instructions please see the Announcement