Using the Payback Method, IRR, and NPV

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wbfflonor

Business Finance

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

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 (Show your calculations):

  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 (show your calculations).

  • 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.

Submit the memo and all calcluations.

Click the Assignment Files tab to submit your assignment.

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Explanation & Answer

Attached.

Running Head: INVESTMENT OPTION

1

Investment Option
Name
Course
Tutor
Date

INVESTMENT OPTION

2
MEMO

To:
From:
Date:
Subject: Investment Option
PART A- the use of the IRR, NPV, and the payback method
The internal rate of return
The internal rate of return as a method is the discount rate at which the present value of the
cash flows is equal. That is, the present value cash inflows are equated to that of cash outflows. It
is defined as the discount rate at which a zero present value is created (Quiry & Vernimmen,
2011). Practically, it is advisable to go with the investment option that has got a higher IRR.
Advantages of IRR
✓ Under this method, the time value of money is considered
✓ During the calculation of the discount rate, this method is considerate of the cash flows.
Disadvantages
✓ Tiresom...


Anonymous
Really useful study material!

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