Elon Musk has asked for your advice. Should he invest $1 billion into his SpaceX company...

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Elon Musk has asked for your advice. Should he invest $1 billioninto his SpaceX company to develop a Mission to Mars – or should heinvest in a second giant battery factory in Nevada? For these twoprojects, which should he look at, NPV or IRR? In other words,generally speaking, what are their positives and negatives andwhich may be more relevant to his situation? Also, what is WACC andhow should he think about it in terms of financing of theseprojects? At this point, you don’t know what the IRR or NPV or WACCare, but what Musk is asking you is more of a sense of what theseare and how they may be relevant to his way of thinking.

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4.2 Ratings (643 Votes)

Elon Musk should take decision based on NPV Whenever there is a conflict between NPV and IRR the project with the higher NPV should be chosen This is because IRR assumes that all cash flows would be reinvested at the IRR This assumption is problematic because there is no guarantee that equally profitable opportunities would be available as soon as the cash flows occur Positives of NPV Unlike IRR NPV doesnt assume that the cash See Answer

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Transcribed Image Text

Elon Musk has asked for your advice. Should he invest $1 billioninto his SpaceX company to develop a Mission to Mars – or should heinvest in a second giant battery factory in Nevada? For these twoprojects, which should he look at, NPV or IRR? In other words,generally speaking, what are their positives and negatives andwhich may be more relevant to his situation? Also, what is WACC andhow should he think about it in terms of financing of theseprojects? At this point, you don’t know what the IRR or NPV or WACCare, but what Musk is asking you is more of a sense of what theseare and how they may be relevant to his way of thinking.