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Purpose of Assignment
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.
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 break-even point and its importance.
- 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:
“Table showing investments and returns for Project A and Project B. Project A has $10,000 initial investment with $5,000 returns in each of the first 3 years. Project B has $55,000 initial investment with $20,000 in each of the first 3 years.”
Show all work.
Explanation & Answer
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Running head: PAYBACK, IRR AND NPV
Using the Payback Method, IRR, and NPV
PAYBACK, IRR AND NPV
To: The Management
From: Mr. ABC
Date: May 26, 2019
Subject: Capital Budgeting
Capital budgeting is a procedure in which the organization can estimate the potential
large investments. This includes projects like building new plant, investment in long term
venture, etc. Capital budgeting is possible with the help of various accounting methods like
payback period method, internal rate of return, and net present value. (Kenton, 2018)
Payback period method means the amount of time taken to recover the cost of an
investment. It is used in financial and capital budgeting to determine the cost savings of the
investment. The advantages are simple and easy calculation, possibility to rank the projects,
and useful in uncertainty. The disadvantages it does not consider an annual cash flow avoids
the capital cost, consider only the ...