# Discounted Payback, IRR

The following projects are being considered by the Corporate Investment Committee who has an investment budget of $900,000. The budget restriction is for the up front investment in the current year only. The MARR used for the evaluation should be 12%.

a) Which project(s) should be chosen if the discounted payback must be achieved in at least 4 years?

b) Which project(s) should be chosen if internal rate of return period is the criteria for each project?

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The following projects are being considered by the Corporate Investment Committee who has an investment budget of $900,000. The budget restriction is for the up front investment in the current year only. The MARR used for the evaluation should be 12%.

a Which project(s) should be chosen if the discounted payback must be achieved in at least 4 years?

b Which project(s) should be chosen if internal rate of return period is the criteria for each project?

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

A 6 ($250,000) ($15,000) $100,000

B 4 ($750,000) 0 $255,000

C 5 ($300,000) ($39,000) $130,000

Annual Cash flows for Projects (Annual Benefits - Annual Cost)

Project A: $85,000 =$100,000.-$15,000.

Project B: $255,000

Project C: $91,000 =$130,000.-$39,000.

Discounted Payback Period

Payback period is the number of years in which the initial investment is recouped

Payback Period = Year before full recovery + (unrecovered cost at start of year/Cash Flow during year)

In the discounted payback period method the cash flows are discounted

Discount Rate= MARR= 12%

MARR= Minimum Acceptable Rate of Return

Project A

Year Cash flow Discount factor @ Discounted cash flow= Cumulative discounted cash flow

12%

0 (250,000) 1 -250,000 =-250,000 x 1 (250,000)

1 85,000 0.892857 75,893 =85,000 x 0.892857 (174,107) =-250,000+75,893

2 85,000 0.797194 67,761 =85,000 x 0.797194 (106,346) =-174,107+67,761

3 85,000 0.71178 60,501 =85,000 x 0.71178 (45,845) =-106,346+60,501

4 85,000 0.635518 54,019 =85,000 x 0.635518 8,174 =-45,845+54,019 Discounted Payback period= 3.85 years

5 85,000 0.567427 48,231 =85,000 x 0.567427 56,405 =8,174+48,231 =3 + 45,845 / 54,019

6 85,000 0.506631 43,064 =85,000 x 0.506631 99,469 =56,405+43,064

99,469

Project B

Year Cash flow Discount factor @ Discounted cash flow= Cumulative discounted cash flow

12%

0 (750,000) 1 -750,000 =-750,000 x 1 (750,000)

1 255,000 0.892857 227,679 =255,000 x ...

#### Solution Summary

The solution selects projects based on Discounted Payback and IRR criteria.