# Computing The NPV, IRR And Discounted Payback Period

? Two projects being considered are mutually exclusive and have the following projected cash flows:

Project A Project B

Year Cash Flow Cash Flow

0 -$50,000 -$50,000

1 15,625 0

2 15,625 0

3 15,625 0

4 15,625 0

5 15,625 99,500

If the required rate of return on these projects is 10 percent, which would be chosen and why?

? Davis Corporation is faced with two independent investment opportunities. The corporation has an investment policy that requires acceptable projects to recover all costs within 3 years. The corporation uses the discounted payback method to assess potential projects and utilizes a discount rate of 10 percent. The cash flows for the two projects are:

Project A Project B

Year Cash Flow Cash Flow

0 -$100,000 -$80,000

1 40,000 50,000

2 40,000 20,000

3 40,000 30,000

4 30,000 0

In which investment project(s) should the company invest?

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#### Solution Summary

This solution illustrates how to compute the net present value, internal rate of return and discounted payback period of mutually exclusive projects.

Capital Budgeting-payback period, discounted payback, NPV, IRR

Question 1

Assume you have just been promoted junior financial manager of a company. You are very smart and are planning to be promoted in the next 2-2.5 years. An associate of your company shows you a project with the following cash flows.

End of Year Cash Flows

0 -$100,000

1 $40,000

2 $40,000

3 $40,000

4 $40,000

5 -$20,000

6 $80,000

a) Compute the payback period of this project.

b) Compute the discounted payback period of this project assuming a discount rate of 5%.

c) Would you accept this project? Explain.

d) Compute the NPV of the project. Is this a good project?

e) Would you use the IRR as evaluation technique for this project? Explain.

Quest 2

A project has the following cash flows:

End of Year Cash Flows

0 -150,000

1 60,000

2 60,000

3 60,000

4 60,000

5 60,000

6 -50,000

7 -50,000

8 -50,000

9 -50,000

10 -50,000

A) Compute the NPV of the project assuming a discount rate of 0%

B) Compute the NPV of the project assuming a discount rate of 8.02%

C) Interpret the results in a) and b)

D)If this project's risk adjusted discount rate is 6% should the project be accepted? Explain

Question 3

The "golden rule" in capital budgeting is to select a project if the NPV of the project is positive. Would you accept a project with a negative NPV? Explain

Please see attached for full question.

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