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# Computing NPV, IRR and Payback Period

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How do I compute NPV, IRR and Payback period when comparing two organizations for acquisition?

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I located two excellent handouts (one presented below, and one attached) explaining and computing NPV, IRR and Payback periods for comparisons. I hope this helps and take care.

RESPONSE:

Financial Primer: How to Calculate ROI, NPV, Payback and IRR for Comparisons

Options for Financial Measures

There are many different techniques to measure the financial attractiveness of any large financial endeavor such as an acquisition. The vast majority of companies use one or more of the following different approaches to make their go or no go investment decisions:
· Present Value
· Return on Investment (ROI)
· Net Present Value (NPV)
· Payback Period
· Internal Rate of Return (IRR)

This primer discusses each of these financial measurement options, outlines the mathematical calculation behind each metric, and uses an example to explain the implications of the measurement's findings.

Present Value

Money held now could be invested in a bank account and is therefore more valuable than money to be received in 12 months. Present value seeks to account for this. It equals the rate by which you have to discount future benefits for you to be indifferent between a benefit received now and a benefit received at the end of the specified time period. The equation for present value is: benefit / (1+discount rate). Just for illustrative purposes, let's say you are a manager at a manufacturing company planning a small new software roll-out.

If the current discount rate is 10% and your benefit at the end of year 1 is \$5,000, the present value of that benefit right now is equal to \$5,000/(1+.1)= \$4,545.45. \$4,500 received now is the same to you as \$5,000 received in 1 year if the discount rate is 10%, since if you invest that \$4,500 and take inflation into account, it will be the ...

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This solution computes NPV, IRR and Payback period when comparing two organizations for acquisition.

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## Compute the NPV, IRR, and payback period for the following investment

1)

Investment criteria) Compute the NPV, IRR, and payback period for the following investment.
The cost of capital is 10%.

Year 0 1 2 3
Cash flow - 200,000 100,000 100,000 150,000

2)

(Cash flows and NPV for a new project) Syracuse Roadbuilding Company is considering
the purchase of a new tandem box dump truck. The truck costs \$95,000, and an additional
\$5,000 is needed to paint it with the firm logo and install radio equipment. Assume the
truck falls into the MACRS three-year class. The truck will generate no additional revenues,
but it will reduce cash operating expenses by \$35,000 per year. The truck will be
sold for \$40,000 after its five-year life. An inventory investment of \$4,000 is required during
the life of the investment. Syracuse Roadbuilding is in the 45% income tax bracket.
a. What is the net investment?
b. What is the after-tax net operating cash flow for each of the five years?
c. What is the after-tax salvage value?
d. Assuming a 10% cost of capital, what is the NPV of this investment?

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