Present-value factors 24% 3.020 3.020 IRR rate – 3.000 26% 2.885 – Difference 0.135 0.020 Internal rate of return = 24% + 0.020 0.135 (2%) = 24% + (0.148) (2%) = 24.30% 2 Let the minimum annual cash savings be €X. Then we want €X (3.889) = €120,000
X = 120, 000 3.889 € = €30,856 Carmelo, SA, would want annual cash savings of at least €30,856 for the net present value of the investment to equal zero. This amount of cash savings would justify the investment in financial terms. 3 When the manager is uncertain about future cash flows, the manager would want to do sensitivity analysis, a form of which is described in requirement 2. Calculating the minimum cash flows necessary to make the project desirable gives the manager a feel for whether the investment is worthwhile or not. If the manager were quite certain about the future cash-operating cost savings, the approaches in requirement 1 would be preferred.
