Discounted Payback, IRR
Not what you're looking for?
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?
Purchase this Solution
Solution Summary
The solution selects projects based on Discounted Payback and IRR criteria.
Solution Preview
Please see the attached file:
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 ...
Purchase this Solution
Free BrainMass Quizzes
Pricing Strategies
Discussion about various pricing techniques of profit-seeking firms.
Economics, Basic Concepts, Demand-Supply-Equilibrium
The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.
Basics of Economics
Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.
Elementary Microeconomics
This quiz reviews the basic concept of supply and demand analysis.
Economic Issues and Concepts
This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.