From the course: Accounting Foundations: Making Business Decisions Using IRR and NPV

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Example: Buying a car in Hong Kong, changing forecasted cash flows

Example: Buying a car in Hong Kong, changing forecasted cash flows

From the course: Accounting Foundations: Making Business Decisions Using IRR and NPV

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Example: Buying a car in Hong Kong, changing forecasted cash flows

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- Let's see if we can save this Hong Kong car purchase investment by reevaluating some of our cashflow assumptions. This will also give us further practice in computing NPV and IRR. NPV and IRR are related ways of evaluating long-term capital budgeting decisions. For the Hong Kong car, using a 10% interest rate, we computed the NPV to be minus $451. This means that the car cost more than the present value of its future cash savings. The simple decision rule is this, do not undertake a project that has a negative NPV. We also computed that the Hong Kong car yields an IRR of 6.40%. The decision rule with IRR is to reject all projects with an IRR less than the comparison interest rate, sometimes called the hurdle rate. The Hong Kong car investment has an IRR that is less than 10% comparison rate, so it's a bad project. So let's say we found a different car. This one is a bit more expensive, costing $6,000, but the…

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