Using the Payback Method, IRR, and NPV

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Business Finance

Description

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.

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Explanation & Answer

Hallo baddie, the answer is attached below. I believe it is perfect.

Running Head: ASSIGNMENT

1

METHODS OF EVALUATING PROJECT CASH FLOWS

Student’s Name:

Institution:

Course:

Instructor:

ASSIGNMENT

2

Internal rate of return (IRR)
This is a tool of measurement used in capital budgeting to measure and predict the profitability
of potential investments. It analyzes the cash flows of a project by making them equal to zero so
as to help in analyzing the viability of projects. It has various advantages and disadvantages.
Advantages include;
This method considers the effect of time on money which is a very important aspect in capital
budgeting.
The method is easy to use and the required rate of return is not required so as to estimate the
profitability of potential investments.
Disadvantages include;
The method does not take into consideration the economies of scale of a project.
The method cannot be effective without analyzing other projects that are actually contingent in
every case.
Net present value (NPV)
NPV is the difference between the cash inflows and cash outflows of a project all in their present
values. It is a method used in capital budgeting to determine the profitability of future potential
investments or projects.
The advantages of this method inc...


Anonymous
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