Respond to peers dicussion post.
Peer 1:

Question A 

Explain why firms choose to decentralize and give an example. 

According this week’s reading, “Decentralized decision making allows managers at lower levels to make and implement key decisions pertaining to their areas of responsibility. This practice of delegating decision-making authority to lower levels of management is called decentralization.”  Firms decide to decentralize for several reasons.  The reason gave the following reason. “ ease of gathering and using local information focusing of central management, training and motivating of segment managers, enhanced competition, exposing segments to market forces.”  Lower-level managers know first-hand what the organizations has to endure.  They are familiar with competition and other areas of business that can be an influences.   Additionally, the reading gives the example of McDonald’s.  This restaurants can be found throughout the world. The menu of th restaurant is culturally based on its location. For example, “The tastes of people in China or France differ from those of people in the United States. So, McDonald’s tailors its menu to different countries.”

  

 

Question B 

Explain why NPV is generally preferred over IRR when choosing among competing or mutually exclusive projects. Why would managers continue to use IRR to choose among mutually exclusive projects? 

 

NPV differs from IRR in two major ways:

The NPV method assumes that each cash inflow received is reinvested at the required rate of return, whereas the IRR method assumes that each cash inflow is reinvested at the computed IRR. Reinvesting at the required rate of return is more realistic and produces more reliable results when comparing mutually exclusive projects.

The NPV method measures profitability in absolute terms, whereas the IRR method measures it in relative terms. NPV measures the amount by which the value of the firm changes.

Since NPV measures the impact that competing projects have on the value of the firm, choosing the project with the largest NPV is consistent with maximizing the wealth of shareholders. On the other hand, IRR does not consistently result in choices that maximize wealth. IRR, as a relative measure of profitability, has the virtue of measuring accurately the rate of return of funds that remain internally invested.



Peer 2:

Decentralization is when a firm chooses to distribute or disperse its functions and powers to increase efficiency. Generally, it involves delegating decision making authority to middle or lower management. When empowered, managers can make key decisions as well as implement the companies strategies and train employees. The information received in a decentralized organization is important for timely responses to changed and evolving conditions. As Vantrappen and Wirtz state, “when deciding on the best level at which a given task should be done, assess the impact of the decision of these four qualities: responsiveness, reliability, efficiency, and perennity”.

NPV is generally preferred over IRR because the NPV method will result in what return you can expect from the project, while IRR method produces the percentage of return that the project is expected to create. The NPV method presents outcomes that formalize the foundation for the investment decision since it presents a return versus the IRR method doesn’t help with decision making or tell the investor how much money will be made. These two methods are mainly used to evaluate investments. These two methods are usually used in conjunction with one another.

 

References

Vantrappen, H., Wirtz (December 2017). F. When to Decentralize Decision Making, and When Not To. Harvard Business Review. Retrieved from https://hbr.org/2017/12/when-to-decentralize-decision-making-and-when-not-to

Gallo, A. (March 2016). A Refresher in Internal Rate of Return. Harvard Business Review. Retrieved from https://hbr.org/2016/03/a-refresher-on-internal-rate-of-return


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