Premier Paper Co

2019 Words9 Pages
Payback period is the time it takes to recoup your initial investment on a project based upon the future cash flows the project is expected to generate. In question one, the synthetic resin has a payback period of 2.50 years where as the epoxy resin has a payback period of 1.50 years, meaning the company will recoup its initial investment one year sooner with the epoxy resin than with the synthetic resin. If the company were determining which project to choose based solely on the payback period, it would choose the epoxy resin.

However, the payback period is flawed as a sole decision-making criterion. A major flaw of the payback period is that it does not take into consideration cash flows after the payback period, thus, potentially
…show more content…
Clearly the Synthetic Resin adds more value to the company than the Epoxy Resin. As a result, our group felt that the Synthetic Resin was a better investment choice provided that Day-Pro can wait the longer period of time for return on their initial investment.

Another way to determine if a project is going to add value to the company is by calculating the Internal Rate of Return (IRR) is most easily defined as the return that leads to a project NPV equal to zero. Another way to define the IRR is to consider it as the discount rate that at which the NPV of cash outflows equals the NPV of cash inflows. In other words, it’s the most discounted rate at which a project can possibly break even. In theory, if a project has an IRR greater than the company’s required return rate, then the project will be profitable and the company should proceed with project.

The IRR is generally the next best accepted method for determining the acceptance or declination of a project due to the fact that it also takes into account the time value of money, the risk associated with cash flows, and an the increased value of invested cash. Knowing that, it is generally accepted that IRR calculations lead to good decisions when it comes to accepting or declining a project. IRR is calculated either through trial and error with the aid of a financial calculator.

In the case of Day-Pro Chemical Company, the required
Get Access