There are many methods for gauging the effectiveness and profitability of an investment. The more analysis tools that you can use, the more prepared you will be to either move forward or decline an investment. There are numerous external factors that have been discussed so far such as the net present value that measures magnitude of return; however, equally important are internal factors regarding the return on investment for measuring efficiency or quantity.
As a financial manager, you must provide feedback on whether to introduce a new product line. As with any new venture, there will be several related costs including start-up costs, operational costs, and more. Initially, you must spend $20,000 to account for most start-up costs and you will earn a profit of $5500 for 5 years.
In this recipe, you will learn to use internal rate of return functions to make a decision of profitability.