Project might not have a high IRR.....?

Question

A project might not have a high IRR but it feeds customers into your high IRR projects. How would you add these factors into your evaluation?

Answer 1

Assume Project A has an IRR of 5% and project B an IRR of 20%. Determine the # of customers from A going into B and the impact on the IRR of B. Say your company has an IRR minimum acceptable of 15%. Does A's contribution keep B's IRR > 15%? This is the decision point.

Sometimes you need to do A to keep B growing.
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Answer 2

When determining the cash flows for a project, you should only use incremental cash flows. Therefore, if your project adds cash flows to another product -- then they should be included in your project. This works the other way, too. If your project canabalizes profits from another product you have, then you should subtract those cash flows before calculating the return.

For example, when Coca-Cola came out with Diet Coke, they had to consider lost sales from Tab and Regular Coke.