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The Case of Global Computer Systems. Compute and analyze the required rate of return for the...

The Case of Global Computer Systems.

Compute and analyze the required rate of return for the project below.

Net Investment Cost (US$, in millions) - $400

Proposed Location - USA

Estimated IRR - 13.5%

Type of Project - New product, new market

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Answer #1

IRR is the the discounting rate at which the present value of all future inflows in equal to the present value of all outflows. A lower discounting rate means high net present value (NPV) and a higher discounting rate would mean low present value. Higher IRR means that the project has good scope bear the cost of capital any discounting rate below IRR will yield a positive NPV.

In this case as long as Global Computer Systems has cost of capital for $400m below 13.5%, it can go ahead with the project. If the cost of project is above 13.5%, the project should not be undertaken unless Global Computer Systems can increase its rate of return above its cost of capital.

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