1

Module 4: Executive Financial Summary

Kenneth Chinweike Nwauzoma

Master of Business Administration, Nexford

University BUS6110: Organizational Strategy

Dr. Micheal Simms

January 31, 2024.

 2

Introduction

The purpose of doing a project analysis is to determine the financial standing of a potential

investment proposition. In the context of this project, the team responsible for execution has

been exchanging ideas for around three months, and the initial investment cost is expected to

be $300,000. This information may be found in the table that follows.

Project Details: The project will require an initial investment of $300,000 and is expected to
return the following cash flows:

Year Amount

1 $25,000

2 $50,000

3 $35,000

4 $120,000

5 $130,000

6 -$25,000

7 $110,000

Executive Summary

Determining the Internal Rate of Return (IRR) over a seven-year period

In the field of financial analysis, the internal rate of return, also known as IRR, is a statistic

that is utilized to determine the profitability of potential sources of investment. The internal

rate of return (IRR) is a discount rate that, when applied to a discounted cash flow analysis,
 3

results in the net present value (NPV) of all cash flows being equal to zero (Fernando, 2023).

With net present values (NPVs) of $31,686 (for the discount rate of 7 percent) and -$6,815

(for the discount rate of 9 percent), the viability of this venture will be determined making

use of two different discount rates, which are respectively 7 percent and 9 percent. To

calculate the internal rate of return (IRR) for the project, these statistics are utilized, and the

result is 8.65 percent. The table below shows the detailed computation of how we arrived at

the above.

Table 1 – NPV Calculation using a 7% discount rate

Year 0 1 2 3 4 5 6 7
Initial
Investment ($300,000)
Annual After-
Tax Cash
Flows
$25,000 $50,00
0
$35,000 $120,000 $130,000
($25,000) $110,000
 4

Discount
Factor
(7%) 1.0000 0.9346 0.8734
0.8163 0.7629 0.7130 0.6663
0.6227
Present Value ($300,000)
$23,364 $43,67
2
$28,570 $91,547 $92,688
($16,659) $68,502
Year 0 1 2 3 4 5 6 7

Initial ($300,00
Investme 0)
nt
Annual $25,00 $50,00 $35,00 $120,00 $130,00 ($25,000 $110,00
Cashflow 0 0 0 0 0 ) 0

Discount 1 0.9346 0.8734 0.8163 0.7629 0.7130 0.6663 0.6227

Factor
7%
Present ($300,00 $23,36 $43,67 $28,57 $91,547 $92,688 ($16,659 $68,502
Value 0) 4 2 0 )

Net PV = ∑PV is $31,686

 5

Table 2 – NPV Calculation using a 9% discount rate

Year 0 1 2 3 4 5 6 7
Initial
Investment ($300,000)
Annual After-
Tax Cash
Flows
$25,000 $50,00
0
$35,000 $120,000 $130,000
($25,000) $110,000
Discount
Factor
(7%) 1.0000 0.9346 0.8734
0.8163 0.7629 0.7130 0.6663
0.6227
 6

Present Value ($300,000)

$23,364 $43,67
2
$28,570 $91,547 $92,688
($16,659) $68,502
Year 0 1 2 3 4 5 6 7

Initial ($300,00
Investme 0)
nt
Annual $25,00 $50,00 $35,00 $120,00 $130,00 ($25,000 $110,00
Cashflow 0 0 0 0 0 ) 0

Discount 1 0.9174 0.8417 0.7722 0.7084 0.6499 0.5963 0.547

Factor
9%
Present ($300,00 $22,93 $42,08 $27,02 $85,011 $84,491 ($14,907 $60,174
Value 0) 6 4 6 )

Net PV = ∑PV is ($6,815)

To calculate the IRR, we will need to consider the NPVs gotten above

Positive NPV (NPV+) = $31,686

Negative NPV (NPV-) = ($6,815)

Discount rate yielding positive NPV (Ra) = 7%

Discount rate yielding negative NPV (Rb) = 9%

According to Vipond (2022) the formular for calculating

 7

IRR = Ra + NPVa (Rb - Ra)

NPVa – NPVb
IRR = 7%+$31,686(9%-7%)
$31,686-(-6,815)

IRR = 8.65%

After the internal rate of return has been calculated, it is often compared against the hurdle

rate or cost of capital of the company. If the internal rate of return (IRR) is higher than or

equal to the cost of capital, the institution would consider the project to be a positive

investment. (Of course, this is made with the assumption that this is the only factor that led to

the decision (Vipond, 2022).

My Recommendation

Based on the analysis done above, my recommendation to the leadership team will be to

pursue the project rather than the investment. The justification to my recommendation is that

the profitability of the project (8.65%) is higher than the yield (7%) from the securities.

According to Vipond (2022), it is worthy to note that if the IRR is greater than or equal to the

cost of capital, the company would accept the project as a good investment.

Conclusion

Taking into consideration the fact that the internal rate of return can be achieved, this project

is in a strong position within the competitive landscape for investment. Additionally, going

by the financial analysis conducted, the anticipated profitability of this project is significantly

favorable when compared to the constraints that it possesses. Consequently, moving forward

with this project idea is a prudent business decision.

 8

References

Fernando, J. (2023, March 30). Internal Rate of Return (IRR) Rule: Definition and Example.

Investopedia. https://www.investopedia.com/terms/i/irr.asp

Vipond, T. (2022). Internal Rate of Return (IRR). Corporate Finance Institute.

https://corporatefinanceinstitute.com/resources/valuation/internal-rate-return-irr/
9