Net Present Value, Payback, Internal Rate of Return
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Consider the following two mutually exclusive projects, each of which require an initial investment of $100,000 and have no salvage value. The organization, which has a cost of capital of 15%, mush choose on or the other.
Year Project A Project B
1 $30,000 $0
2 $30,000 $20,000
3 $30,000 $20,000
4 $30,000 $50,000
5 $30,000 $90,000
a. Compute the payback period of these projects. Using the payback criterion, which of the two projects are more desirable?
b. Compute the net present value of these two projects. Using the NPV, which project is more desirable?
c. Compute the internal rate of return for each project.
d. Assuming that straight-line depreciation is used to compute income, compute the accounting rate of return for these two projects.
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Given that,
Year Project A Project B
0 ($100,000) ($100,000)
1 $30,000 0
2 $30,000 $20,000 ...
Education
- MBA, Indian Institute of Finance
- Bsc, Madras University
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