# Managers at DeJohn Corporation are analyzing a potential investment of $2,000,000 in equipment and the processes needed

## Question:

Managers at DeJohn Corporation are analyzing a potential investment of $2,000,000 in equipment and the processes needed to manufacture and market MyHelperBotz, a product line of robots designed to assist elderly customers with daily tasks. Management feels that this equipment and project would be viable for a five-year period, although robot technology is rapidly evolving.

The sales manager, Tobias Anderson, calculated an internal rate of return (IRR) of 22.7% for the investment using the most likely cash flows for the project’s five-year life. Anderson then recommended that DeJohn make this investment in MyHelperBotz because it exceeds the DeJohn capital investment hurdle rate of 16%.

The controller, Meredith Hudak, countered with a sensitivity analysis using the IRR function in Excel that included three potential scenario outcomes.• Scenario #1: Most likely scenario. This scenario shows managers’ best estimate of the investment’s yearly net cash inflows and assumes no residual value.• Scenario #2: Best-case scenario. This scenario reflects cash flows that are 20% higher than the most likely scenario. It also assumes a $100,000 residual value at the end of Year 5.• Scenario #3: Worst-case scenario. This scenario reflects cash flows that are 20% lower than the most likely scenario, and assumes no residual value.

To follow is Hudak’s analysis for the MyHelperBotz investment.

1. What does the internal rate of return (IRR) measure?2. What is the weakness in Anderson’s analysis?3. Look at Hudak’s Excel analysis. Why would it be important to evaluate the IRR both at the end of three years and at the end of five years for this project?4. Does Hudak’s analysis support Anderson’s conclusion that the project should definitely be accepted? Why or why not?5. Describe the steps in Excel that would have been taken to calculate the IRR in Cell B12. How would the calculation in cell B13 differ from the calculation in Cell B12?

## Step by Step Answer:

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