Payback Method IRR and NPV To continuously sustain the business operations the business requires investing a considerable amount of funds in various projects time-to-time. To appraise the projects the organization can make use of different appraisal mechanisms to ascertain the expected benefits and potential returns that can be gained by investing in a particular project and select the best alternative. Net Present Value (NPV) NPV method will assist the organization to reproduces the differences in the PV of the cash inflows that are likely to be received by investing in a particular project with the funds required for investment in the project. The positive NPV indicates that the project will likely to be a profitable option for the organization for investment (Oliver 2000). The obvious advantage that by investing Project A the organization expected to earn a positive returns. Payback Period Project A PBP = 2 years Project B PBP = 2 + (|-15 000|/20 000) * 12 = 2 years 9 months Based on the calculations it was that 2 years would require to recoup the initial investment in Project A whereas 2 years and 9 months to recover initial investment of Project B. Thus Project A will be the more profitable prospect of investment for the organization. References Heitger D. L. et. al. 2007. Fundamental Cornerstones of Managerial Accounting. Cengage Learning. Oliver L. 2000. The Cost Management Toolbox. AMACOM Div American Mgmt Assn. Peterson P. P. & Fabozzi F. J. 2004. Capital Budgeting: Theory and Practice. John Wiley & Sons. [...]
The purpose of this assignment is to allow the student to calculate the project cash flow using net present value (NPV), internal rate of return (IRR), and the payback methods. Assignment Steps Resources: Corporate Finance Create a 350-word memo to management including the following: Describe the use of internal rate of return (IRR), net present value (NPV), and the payback method in evaluating project cash flows. Describe the advantages and disadvantages of each method. Calculate the following time value of money problems: If you want to accumulate $500,000 in 20 years, how much do you need to deposit today that pays an interest rate of 15%? What is the future value if you plan to invest $200,000 for 5 years and the interest rate is 5%? What is the interest rate for an initial investment of $100,000 to grow to $300,000 in 10 years? If your company purchases an annuity that will pay $50,000/year for 10 years at a 11% discount rate, what is the value of the annuity on the purchase date if the first annuity payment is made on the date of purchase? What is the rate of return required to accumulate $400,000 if you invest $10,000 per year for 20 years. Assume all payments are made at the end of the period. Calculate the project cash flow generated for Project A and Project B using the NPV method. Which project would you select, and why? Which project would you select under the payback method? The discount rate is 10% for both projects. Use Microsoft® Excel® to prepare your answer. Note that a similar problem is in the textbook in Section 5.1. Sample Template for Project A and Project B: Show all work.