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Measuring Profit

To this point, the sensitivity analysis has been simplified by considering only one measure of profit: payback period. There are other measures that you can use, and each of these alternatives provides another point of view on your profit. These include the Internal Rate of Return and the Profitability Index.

Calculating Internal Rate of Return

Given the assumptions used in the Base Case, it is apparent that introducing a new product will generate more than a 10% return on the funds that the project requires. This is easy to determine from the net present value of the project. Taking the discount rate (10%) into account, the project returns a positive net present value. The company therefore has positive earnings compared to the 10% alternative.


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