Colorado Technical University Online how Is the Internal Rate of Return Calculated Discussion

Primary Task Response: Within the Discussion Board area, write 350–450 words that respond to the following questions with your thoughts, ideas, and comments. This will be the foundation for future discussions by your classmates. Be substantive and clear, and use examples to reinforce your ideas.

Additional Information: Eddison Electronic Company (EEC) provides electricity for several states in the United States. You have been employed as a cost accountant at this organization. You were asked to provide training to operational managers in areas in which they are struggling, such as internal rate of return, simple rate of return, and net present value. Please discuss the following:

• How is the internal rate of return calculated?
  • Explain how it supports a capital business decision versus the NPV model.
• Explain how simple rate of return has been used in a company you are familiar with related to capital budgeting.

Reading information:

Decision Making

Decision making determines the future direction of a business organization. These decisions can have a short-term or long-term impact on the business. The decision maker must have relevant information. This information makes a difference between alternative decisions. Even with relevant information, the decision maker must speculate, estimate, and anticipate the outcome and impact of the decision. Successful decision making is the ability to sort through all of the data and information to find the relevant data to make the best decision.

Relevant Information

Appropriate relevant information has two characteristics. It must make a difference in a decision, and it must be future-oriented.

For example, you research two different schools. Both cost the same, but the curriculum and method of teaching are different. The relevant information for making your decision is information about the curriculum and method of teaching. The more you know about each, the better your decision will be for your future. The cost information is not relevant for this decision because both cost the same.

If a third school with a significantly lower cost comes into the picture, but with the same curriculum and method of teaching, then cost becomes part of the relevant information needed in making your decision.

In business, relevant information is important in many decision-making scenarios. Types of relevant information include the following:

• Costs
• Revenues
• Production capacities
• Cash flows
• Customer desires
• Market environment
• Pricing
• Management competence

Decision-making managers must be able to identify the information that will make a difference in the decision and is relevant to the future to make their decision.

Types of Decisions

As you can imagine, the number and variety of decisions made by managers is endless. There are, however, frequently encountered decisions in business practices including the following:

• When to replace equipment and other assets
• When to outsource or produce a product
• How to allocate scarce resources
• When to accept lower prices on customer orders

Relevant information for making these decisions would include unit cost, available manufacturing capacity, contribution margin, impact on market, and reaction of other customers.

Types of Analysis

The analysis of financial information for decision making focuses on those pieces of information that provide the desired data to make a decision. Management uses many different forms of information in management decision making, but most forms will include a comparison of data. Two examples are horizontal analysis and vertical analysis.

The horizontal analysis is a comparison of a single item or data over a period of time, either short-term or long-term. An example would be the analysis of a single expense account, operation, or customer account. The information could include actual amounts, trends over time, averages, or percentages.

Vertical analysis usually uses percentage to compare information. The vertical analysis can include many items or data over a period of time comparing each item to the other using percentages. A statement comparing each element to the other, like cost of goods sold as a percentage of total sales, is a good example of vertical analysis.