FIN571 WK 3 University of Phoenix Using the Payback Method, IRR, and NPV

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wbarf4203

Business Finance

FIN571

University of Phoenix

john dellinger

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Good Morning John,

Hope all is well...I have attached all of the necessary information needed to complete this assignment. In addition, will you provide at least two references, one from the book and any other one.

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FIN/571: Corporate Finance Wk 3 – Using the Payback Method, IRR, and NPV Assignment Content Resource Corporate Finance 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. Assignment Steps Create a 350-word memo to management including the following: o Describe the use of internal rate of return (IRR), net present value (NPV), and the payback method in evaluating project cash flows. o Describe the break-even point and its importance. o Describe the advantages and disadvantages of each method. Calculate the following time value of money problems: 4. 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%? 5. What is the future value if you plan to invest $200,000 for 5 years and the interest rate is 5%? 6. What is the interest rate for an initial investment of $100,000 to grow to $300,000 in 10 years? 7. 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? 8. 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. o Which project would you select, and why? o Which project would you select under the payback method? The discount rate is 10% for both projects. o Use Microsoft Excel to prepare your answer. o 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. Submit the memo and all calculations. PRINTED BY: jonespage4203@email.phoenix.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. PRINTED BY: jonespage4203@email.phoenix.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. PRINTED BY: jonespage4203@email.phoenix.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. PRINTED BY: jonespage4203@email.phoenix.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. PRINTED BY: jonespage4203@email.phoenix.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. PRINTED BY: jonespage4203@email.phoenix.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. PRINTED BY: jonespage4203@email.phoenix.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. PRINTED BY: jonespage4203@email.phoenix.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. PRINTED BY: jonespage4203@email.phoenix.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. PRINTED BY: jonespage4203@email.phoenix.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. PRINTED BY: jonespage4203@email.phoenix.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. PRINTED BY: jonespage4203@email.phoenix.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. PRINTED BY: jonespage4203@email.phoenix.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. PRINTED BY: jonespage4203@email.phoenix.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. PRINTED BY: jonespage4203@email.phoenix.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. PRINTED BY: jonespage4203@email.phoenix.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. PRINTED BY: jonespage4203@email.phoenix.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. PRINTED BY: jonespage4203@email.phoenix.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. PRINTED BY: jonespage4203@email.phoenix.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. PRINTED BY: jonespage4203@email.phoenix.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. PRINTED BY: jonespage4203@email.phoenix.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. PRINTED BY: jonespage4203@email.phoenix.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. PRINTED BY: jonespage4203@email.phoenix.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. PRINTED BY: jonespage4203@email.phoenix.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. PRINTED BY: jonespage4203@email.phoenix.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. PRINTED BY: jonespage4203@email.phoenix.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. PRINTED BY: jonespage4203@email.phoenix.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. PRINTED BY: jonespage4203@email.phoenix.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. PRINTED BY: jonespage4203@email.phoenix.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. PRINTED BY: jonespage4203@email.phoenix.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. PRINTED BY: jonespage4203@email.phoenix.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. PRINTED BY: jonespage4203@email.phoenix.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. PRINTED BY: jonespage4203@email.phoenix.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. PRINTED BY: jonespage4203@email.phoenix.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. PRINTED BY: jonespage4203@email.phoenix.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. PRINTED BY: jonespage4203@email.phoenix.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. PRINTED BY: jonespage4203@email.phoenix.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. PRINTED BY: jonespage4203@email.phoenix.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. PRINTED BY: jonespage4203@email.phoenix.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. PRINTED BY: jonespage4203@email.phoenix.edu. Printing is for personal, private use only. 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Explanation & Answer

please add the textbook you use as reference

discount rate

Project
A
B

initial investment
Year 1
year 2
year 3

NPV

10%

Initial investment
$10,000
$55,000

cash inflows investment project A
-10,000
5,000
5,000
5,000

$2,434.26

Year 1

Year 2
$5,000
$20,000

cash inflows investment project B
-55,000
20,000
20,000
20,000

($5,262.96)

$5,000
$20,000

Year 3
$5,000
$20,000


Surname 1
Student Name
Lecturer
Course
Date
Payback Method, IRR & NPV
The Internal rate of return, net present value and the payback period are all used in capital
budgeting. The payback period is used in calculating the length of time taken to regain the
original investment. Payback is used to monitor the liquidity of a company in case it possess a
major concern. It indicates whether the company can focus on other projects. In case of having
limited funds, company might focus on recovering the initial investment to be able to undertake
other projects. However, there are disadvantages of using the payback period, one is that it does
not account for the time value of money. It is only calculated as per the value at the time the
amount is invested. Another disadvantage is that they don’t factor in the cash flows occurring
towards the end of the project, e.g. the salvage value.
The Internal rate of return (IRR) is used in estimating the profitability of a potential
investment. A higher IRR will represent a desirable project. An advantage of IRR is that it can be
used in ranking multiple prospective projects evenly. It is therefore used in selecting the best
project to undertake. IRR is also used in evaluation of stock buyback programs. However, the
IRR has several limitations, one being if used alone it can give misleading information, its value
might be low but the NPV might be high thus the return period might be slow/ take a long time.
The Net Present Value (NPV) indicates the present value of the inflows of cash and cash
flows present values over a period of time. NPV is used when investing and pl...


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