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NPV & the payback rule

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The following projects are being considered by the Corporate Investment Committee who has an investment budget of $1,000,000. Project approval will be granted if the payback is achieved within 3 years. Which ones will be funded?.

Project Length of project Up Front Investment Annual Cost each Year Annual Benefits

A 3 $250,000 $15,000 $100,000
B 6 $500,000 0 $120,000
C 4 $300,000 $40,000 $150,000
D 5 $400,000 $80,000 $200,000
E 3 $175,000 $180,000 $250,000

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Solution Summary

NPV and the payback rule are assessed in terms of which projects will be funded. The solution is provided using an Excel spreadsheet attached.

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Jayant Kumar, MBA
Education
  • MBA, Indian Institute of Finance
  • Bsc, Madras University
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