Purchase Solution

# Payback period, NPV, IRR

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Strategic decision makers are required to be able to evaluate projects based on the long-term objectives of the firm as well as the project's ability to earn the company additional compensation. The 3 main tools used to make this evaluation are the pay-back period, net present value (NPV), and internal rate of return (IRR).
Year Project #1 Project #2 Project #3
0 (\$30,000) (\$32,000) (\$35,000)
1 \$11,000 \$15,000 \$11,000
2 \$11,000 \$14,000 \$11,000
3 \$11,000 \$11,000 \$11,000
4 \$11,000 \$2,000 \$11,000
5 \$11,000 \$500 \$11,000
Scenario NPV Rate
1 5%
2 5.5%
3 6%
Using the data in the tables above, answer the following questions:
- Calculate the NPV for each project using each scenario's NPV rate. Show your work.
- Calculate the pay-back period for each project. Show your work.
- Calculate the IRR for each project. Show your work.
- Which project would the company select using the NPV method in scenario 1? Explain your answer.
- Which project would the company select using the NPV method in scenario 2? Explain your answer.
- Which project would the company select using the NPV method in scenario 3? Explain your answer.
- Which project would the company select using the pay-back period? Explain your answer.
- Which project would the company select using the IRR method? Explain your answer.

##### Solution Summary

Strategic decision makers are required to be able to evaluate projects based on the long-term objectives of the firm as well as the project's ability to earn the company additional compensation. The 3 main tools used to make this evaluation are the pay-back period, net present value (NPV), and internal rate of return (IRR).
Year Project #1 Project #2 Project #3
0 (\$30,000) (\$32,000) (\$35,000)
1 \$11,000 \$15,000 \$11,000
2 \$11,000 \$14,000 \$11,000
3 \$11,000 \$11,000 \$11,000
4 \$11,000 \$2,000 \$11,000
5 \$11,000 \$500 \$11,000
Scenario NPV Rate
1 5%
2 5.5%
3 6%
Using the data in the tables above, answer the following questions:
- Calculate the NPV for each project using each scenario's NPV rate. Show your work.
- Calculate the pay-back period for each project. Show your work.
- Calculate the IRR for each project. Show your work.
- Which project would the company select using the NPV method in scenario 1? Explain your answer.
- Which project would the company select using the NPV method in scenario 2? Explain your answer.
- Which project would the company select using the NPV method in scenario 3? Explain your answer.
- Which project would the company select using the pay-back period? Explain your answer.
- Which project would the company select using the IRR method? Explain your answer.

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