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Finance: Net present value,payback and IRR

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400 - 600 words; 1+ page of calculations and 100 - 150 words
Details: The CEO has given you 3 different large projects he's evaluating to see which might be most beneficial to the company to invest in.

1). A new labor-saving piece of equipment that cost $200,000 and will reduce labor and quality costs by $40,000/year for 6 years. Calculate the following methods for this case
a. Simple payback: normal target for project approval is 2 years or less
b. Net present value (NPV): approval requires at least that NPV > 0
c. Internal rate of return (IRR): project approval requires that IRR at least exceed the firms minimum acceptable return, or hurdle rate, of 20%

2). A new marketing program, costing $1,000,000, which is expected to increase current sales of $10,000,000/year by 20% for the next 3 years only. The current contribution margin of 40% will remain in effect even with this sales increase. Calculate the following methods for this case
a. Simple payback: normal target for project approval is 2 years or less
b. Net present value (NPV): approval requires at least that NPV > 0
c. Internal rate of return (IRR): project approval requires that IRR at least exceed the firms minimum acceptable return, or hurdle rate, of 20%

3). Launching a new product will cost $700,000; the product is expected to sell for $60/unit at a volume of 10,000 units/year for 3 years, at a 50% contribution margin. Calculate the following methods for this case
a. Simple payback: normal target for project approval is 2 years or less
b. Net present value (NPV): approval requires at least that NPV > 0
c. Internal rate of return (IRR): project approval requires that IRR at least exceed the firms minimum acceptable return, or hurdle rate, of 20%

The firm's overall cost of capital is 15%.

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Solution Summary

The solution deals with issues in finance: Internal rate of return, Net present value and payback period calculations.

Solution provided by:
Chidi Ngene, M. Sc.
Education
  • B. Sc., University of Nigeria
  • M. Sc., London South Bank University
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