Return on Investment Case Study

This essay will discuss the net present value (NPV), payback period (PBP) and internal rate of return (IRR) approaches for a project evaluation. It is often said that NPV is the best approach investment appraisal, which I why I will compare the strengths and weaknesses of NPV as well as the two others to se if the statement is actually true.

As the Assistant Financial Analyst, the recommendation is based on Caledonia Product’s financial models and future trends, most notably future earnings. Project A is the one that should be accepted to avoid potential risks and safeguard the company’s investment. Let’s review the payback period, net present value, and internal rate of return report. The payback period is essential because it separates the long-term and short-term projects, favoring Project A, which recoups its investment more than year earlier than Project B. the best advice is to invest with the project that has a shorter payback period because the liquidity will increase, plus it spotlights the

a. What is each project’s payback period? According to Financial Management: Principles and Applications Payback period is defined as “A capital-budgeting

(a) What is the project payback period if the initial cost is $1,700? (b) What is the project payback period if the initial cost is $3,300? (c) What is the project payback period if the initial cost is $4,900?

Internal rate of return (IRR) and Payback period “IRR of a project provides useful information regarding the sensitivity of the project’s NPV to errors in the estimate of its cost of capital” (Pierson et al.2011, pp.157).This proposal also shows the project is profitable by using Excel to get the IRR of 18.9%, which is

cost. The machines for project A cost $1,000 and, if purchased, you anticipate that the project

Two new software projects are proposed to a young, start-up company. The Alpha project will cost $150,000 to develop and is expected to have annual net cash flow of $40,000. The Beta project will cost $200,000 to develop and is expected to have annual net cash flow of $50,000. The company is very concerned about their cash flow.

In the final year of maturity, I will receive the principal of the bond and the coupon. Plus, when making these calculations and collecting data I have assumed that the bond is selling at par. All this means is that the bond will be sold for $100,000, which also means for the next five years I will have to give up the coupon payments of 4,250 if I do sell this bond.

The next method to examine is Net Present Value (NPV). According to the website Value Based

There are two common ways, which are: NPV and Profitability index, are used to evaluate and review investments, through calculating the capital expenditure to select the profitable project.

The payback period is the time it takes for a project or investments cash outflows to be recovered by cash inflows generated from the same project or investment. It is a very simple and commonly used capital budgeting technique. The formula used to compute the payback period is initial investment divided by cash inflow per period. You generally want to choose the investment that provides the shortest payback period, because you will get you cash back and it can be put toward other investments or projects. The longer the payback period the riskier it is. Top management will normally have a target payback period. They should select the project that offers a payback period less than the target. There

Therefore, the NPV of both projects are positive. If the company has enough money to investment both of the projects, then it should accept both of them. However, if the company just has money to invest one of these projects, it should invest in the project B since it has the highest NPV.

The Payback period method has disadvantages such as ignoring the time value of money, ignoring cash flows beyond the payback period (ignoring the profitability of a project), risk and opportunity cost. Payback period also doesn’t specify any required comparison to other investments or even to not making an investment.

Total cost structure suggests that the costs they will incur during the business would be 8,196,000 per annum and the revenue generated for the project would be 12,100,000 per annum.

The project costs $8m and $9m respectively and the company’s cost of capital is 14%.