Payback Method, IRR, and NPV

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RET2015

Description

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:

• Describe the use of internal rate of return (IRR), net present value (NPV), and the payback method in evaluating project cash flows.

Calculate the following time value of money problems:

1. 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%?
2. What is the future value if you plan to invest \$200,000 for 5 years and the interest rate is 5%?
3. What is the interest rate for an initial investment of \$100,000 to grow to \$300,000 in 10 years?
4. 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?
5. 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.
• Note that a similar problem is in the textbook in Section 5.1.

Sample Template for Project A and Project B:

Show all work.

Submit the memo and all calcluations.

Note: two files to submit are required -- one MS Word File and one MS Excel spreadsheet

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Corporate decisions
Name
Institution
Date

CORPORATE DECISIONS

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Memorandum
To: Management
From: Student’s Name
Date: 11th December, 2017
Subject: Calculation of Project Cash Flow Using the Net Present Value (NPV), Internal
Rate of Return (IRR) and the Payback Methods
The Net Present Value (NPV) is generally the difference between the present value of cash
outflows and the present value of cash inflows. This method is always used for purposes of capital
budgeting or in an assessment to determine how profitable a certain project will be. Before
embarking on any investment or project, the managers must be so keen to ensure that they will be
able to earn from it. Wh...

Review

Anonymous
Awesome! Perfect study aid.

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