3. Internal Rate of Return

The internal rate of return is used by economists and investors to identify the expected financial outcome of a given project. It is generally accepted that the final value of the internal return will vary from the initial calculations, but it is still relevant as the proportions in modifications will tend to remain relatively constant. The internal rate of return can be perceived similarly to the growth rate a project is expected to return and given this situation, the project with the highest IRR will be the one to be selected by the organization (Investopedia, 2009).

Internal rates of return for the four alternative investment projects are: project A -- 21%, project B -- 25%, project C -- 24% and project D -- 23%. Based on this measured rates, the most desirable course of action for Galaxy Satellite Co. is investment project B, with the highest IRR of 25%.

4. The Decision

The manager...

is placed in the difficult position in which he has to choose between two investment projects that have tested superior values using two different decision making tools. In terms of the net present value, the most desirable investment alternative is constituted by project D, whilst based on the internal rate of return, the most profitable course of action is set by project B. Given this dilemma, it is necessary to look at the goals Galaxy Satellite Co. is striving to achieve with the new investment. As pointed out by them, these objectives are those of maximizing the investment budget and concomitantly increasing shareholder value. These desiderates are best revealed by the internal rate of return, leading then to the conclusion that investment project B. is the most desirable course of action.
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