Using the Payback Method, IRR, and NPV

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Using the Payback Method, IRR, and NPV

Using the Payback Method, IRR, and NPV

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: 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. • Use Microsoft® Excel® to prepare your answer.

Sample Template for Project A and Project B:

Initial Investment Year 1 Year 2 Year 3 Project A (10,000) 5,000 5,000 5,000 Project B (55,000) 20,000 20,000 20,000

Show all work. Submit the memo and all calculations. Format your presentation consistent with APA guidelines.

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