Financial Analysis of Proposals

Compute the payback period for each of the following two separate investments (round the payback period to two decimals):

The payback period allows an analyst to evaluate the duration it takes for the company to generate dollar returns that pay back the initial cost of the investment. The positives of this approach are that it is fairly easy to understand by both management and

Payback period is the simplest method of the capital budgeting. It does represent the actual amount of period needed for the cash flow that is produced by the investment in repaying back the cost of the original investment. The advantage of this analysis is that it has the provision of insight into liquidity of the investment. Unfortunately, this analysis only includes cash flow payments only within the payback period but not those that are beyond(Hofstrand, 2013).

2. The payback period is the period of time it takes an investment to generate sufficient cash flows to:

From a business stance, a shorter payback period is better as less time is required to get even with the starting investment. Along these lines, the parameter depends on the Investment cost and EBT (See Appendix A for formulae).

8th Project 6 7 8 1 4 5 2 3 Discounted Payback Period 1.00 2.70 6.84 7.84 9.09 13.15

is only three years. Second; the payback period for the project A is 3 years and for G

The problem with the NPV method is that this method will be difficult to explain to the stakeholders who are not financially literate. Another problem that we will face using this method is that NPV is calculated in dollars, instead of percentages (Gallagher, 2003). Many stakeholders prefer to work with percentages to easily compare the project with other alternatives.

While neither option meets all the criteria, Option B is the most cost-effective and efficient option of the two. Additionally, Option B's higher internal rate of return of nineteen percent provides the best re-investment opportunity for the future. Research shows that the internal rate of return "is and has been a popular measure of worth for purposes of project evaluation. It defines the return achieved by an investment (or true cost of a loan) and can often be viewed as a measure of efficiency" (Hartman & Schafrick, 2004, p. 139). Additionally, Option B has a positive net present value, while Option A has a negative net present value. In addition, the payback period for Option B is five years and the payback period for Option A is 7.475 years. In addition, the payback period for Option B is outside the city council's 2.75 years requirement. The long payback period should not disqualify Option B from city council members' decision-making process. Empirical tests show that "the net present value method is usually a better guide in the

The payback period is less than 5 years; we can see it in the next graph, where the line crosses the X axis in the point 4.57, which is the calculated payback period.

To make the payback period 2 years the annual cash flow should be increased to $ 500000

Proposal A is to build a new factory to decide if this would be a feasible move for the company they need to perform a net present value analysis. To do this they will only need to look at the incremental cash flows, which are as follows:

An evaluation of capital budgeting will give a concise view of the process management takes to determine the return on a potential investment. After analyzing this concept, the following methods used in making capital budgeting decisions will be discussed: internal rate of return, net present value, and payback period. For each of these three methods, an explanation of the strengths and weaknesses, how they are used, and decisions rules will be given.

So if 4 million Euro is invested with the aim of earning 500.000 per year (net cash earnings), the payback period is calculated thus:

Why is it difficult to calculate the payback period for this project? Calculate the investment’s net present value at each of the following discount rates: 0%, 5%, 10%, 15%, 20%, 25%, 30%, 35%. What does your answer to part (b) tell you about this project’s IRR? Should Aragorn invest in