# Internal rate of return model using this same

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Internal Rate of Return ModelUsing this same information, the IRR can be calculated for this project to generate a 50% IRR. The IRR model is used to find the interest rate that will bring the projects cash flows to a NPV of 0. When this model is used, any rate over the WACC should be accepted. In order to do this, we need the initial cash flow out and the net cash flows received through the term of the project. To determine whether this project should be accepted, it must noted that Home Depot’s WACC is estimated to be 8%. Based on this information, the project should be accepted. Implications9
Home Depot Final AnalysisAlthough both of these capital budgeting calculations point toward the acceptance of the project, it should be noted that these are both also based on the estimated cash flows and the current WACC of Home Depot. These cash flows and rates may be determined using several models that are able to almost guarantee the results, however, the actual outcome is unknown until the project is underway. Due to this being an independent project with normal cash flows, the NPV and IRR always lead to the same decision (Ehrhardt et al, 2017). The actual payback period, or the number of years for the initial investment funds to be recovered for the project, is alittle less than two years.The NPV, as mentioned above, focuses on determining the present value of the future cash flows of the project, less the initial cost—projects with a positive NPV should be accepted. The NPV uses a rate that is assumed to be a stable estimate for the discount rate and the reinvestment rate. The IRR again takes these cash flows, however, instead of using the discount rate, it sets the NPV to 0 and solves for the rate while using the IRR rate as the reinvestment rate.Generally, projects should be accepted when the IRR is greater than the discount rate. The IRR can be risky due to only measuring whether or not a project meets the minimum return rate of thecompany based off the calculated WACC. Any additional risk, foreign market risk or new product/market risk, should be added to this rate to give the most accurate results. Using the IRR is more reliable for short term projects where these numbers won’t fluctuate as much. It also doesnot take into effect the financial consideration of the company. A small project may appear to take precedence over a larger project due to having a higher IRR, but, may have a much lower present value.For this project, I would recommend that Home Depot use the NPV model. This model will better capture the cash flows of the project, which, will help get a better understanding of the10
Home Depot Final Analysispotential profitability of the project (Arshad, 2012). Also, given the concept of how the NPV model works, it is easier to understand that when a projects NPV results in a value over 0, it will be profitable. The NPV model also allows for the accurate evaluation when there are changing cash flows, which proves as a weakness of the IRR method. The IRR method would be a good