Description
Resources: Chapter 5 Corporate Finance (Net present value and other Investment Rules)
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.
List references as separate page
Explanation & Answer
Attached.
Running Head: USING THE PAYBACK METHOD, IRR, AND NPV
Using the Payback Method, IRR, and NPV
Memo
Name
Instructor
Institutional Affiliation
Date
1
USING THE PAYBACK METHOD, IRR, AND NPV
2
MEMO
To: The Management
From: John McKain (Financial Manager)
Date: June 26th, 2017
Subject: Using the Payback Method, IRR, and NPV
Net Present Values
The internal rate of return, the net present value, and the payback methods play a critical role
when evaluating projects. Financial managers employ the use of these measures when making
capital budgeting decisions so as to enable them to evaluate the viability of a project (Abor,
2017). It should be noted that the net present value (NPV) is the difference between the present
value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to
analyze the profitability of a projected investment (Abor, 2017). A positive net present value
indicates that the project is viable since the project capital inflow exceeds the anticipated cost of
the investment. Positive net present values are always desirable while negative NPVs are
unattractive to the company since they result in net loss.
Advantages and disadvantages
The main advantage of NPV is that NPV takes into account the time value of money by creating
an understanding that a dollar today is worth more than a dollar tomorrow. NPV can tell whether
an investment is profitable or not by factoring in the cash flows (Abor, 2017). NPV takes into
account the cost of capital...