I must admit that you have presented a well-articulated and detailed approach undertaken in choosing a project between two competing alternatives. The two projects are project #1 and project#2. From your work I deduced that Project #1 was selected because it has a higher IRR of 14.20% compared to project #2 which has an IRR of 13.05%. This selection is consistent with the concept of IRR. This selection is seen in paragraph one. In section two the paper explains well why NPV is the most reliable method when comparing two mutually exclusive projects. An excellent graphical representation of the NPV profiles in paragraph 8 is done. I must applaud the coherence of ideas, the systematic approach adopted, and the overall presentation of the paper which makes it relatively easier to follow.
This work responds well to the assignment, which is designed to identify methods that should be adopted when choosing projects that shall bring higher value to investors. Great ideas like using the NPV method is the most reliable when choosing between two mutually exclusive projects have been presented. It is also interesting to see that when choosing between independent projects, a project with a positive NPV was accepted. The main point, which is to suggest a better method in different situations, is clear, and the work under review is well organized. The development of ideas is seen paragraph wise, and the arguments on the ways are compelling. Also, the evidence is well cited and used. It is noteworthy to state that information that is not common knowledge is well referenced. Hence demonstrating the ability of your group to conduct research and synthesize research findings.
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The introduction clearly announces the topic, which concerns project investment, cash flows, and the company’s cost of capital ( Jerman-Blažič, 2008) . It also elucidates the two methods used when deciding on which project to investment in in a bid to warrant a higher return on investment. The introduction also approaches that should be employed in selection of prospective investment opportunities. Ideas about this method and projects are clear and easy to understand.
In paragraph two and three, NVP is used in assessing the lucrative potentials of the investment option ( Yi, Goh, & Lee, 2013) . Although the group has impeccably written the assignment, the abbreviation NVP was used without the definition of the abbreviation in the lead paragraphs. In section eight when creating the NPV profile, it is evident that the labeling of one of the colors is not as it is in the graph. Instead of labeling green, it is labeled blue.
I was wondering in what situation should the IRR method be the best since in this work I only see the NPV method chosen over the IRR method in almost every case. Therefore, explicitly stating instances where the IRR model would be preferred over NVP would have improved the comprehensiveness of the discussion. If there is no situation where it works best, does it means it is a useless method? And if so, should it be discouraged from being used by investors? I am mentioning this aspect because investors need to see, know and understand not only one but both methods.
What I see as the main point in this work is the identification of an ideal method to use when considering which project to invest in, keeping in mind whether the alternative projects are independent or mutually exclusive. Also, the company’s cost of capital is also factored in the financial computations that seek to establish the most lucrative project. From the presented work, it is apparent that the NPV method fits in almost every situation and it yields better or most accurate results than the IRR method.
Reference
Jerman-Blažič, B. (2008). Towards a standard approach for quantifying an ICT security investment. Computer standards & interfaces , 30 (4), 216-222.
Yi, H. M., Goh, J. T., & Lee, J. I. (2013). Investment beneficial analysis of rice alternative plants. Korean Journal of Agricultural Science , 40 (2), 169-176.
