The Dilemma at Day Pro

2838 WordsJun 6, 201212 Pages
The Dilemma at Day Pro 1. The payback period can be defined as the length of time it takes before the cumulated stream of forecasted cash flows equal the initial investment (Arnold 2007). By looking at Appendicle A1.0 and A1.1 we can see that the "Epoxy Resin" project has a payback period of 1.5 years while Synthetic Resin has a longer payback period of 2.5 years. On the basis of this methodology we will choose to invest in Epoxy Resin. Though it is important to understand that payback period cannot be used as a measure of probability, as it does not take into account the cash flows after the payback period, thus making it ineffective. Another drawback to payback period is that it simply ignores the time value of…show more content…
IRR could be misleading in deciding the mutually exclusive projects but we still must take it into consideration as it can consolidate our decision if it has no conflict with NPV. 5. NPV is a very strong tool that can be used to determine the potential wealth generated from a project; this is done by accumulating the sum of all the cash flows and discounting them with the relevant discount factor (E1.0 & E1.3). What makes NPV a powerful tool is that it address the fact that £1 today is worth in the future. The rule is that all positive NPV investments enhance shareholders wealth, the greater the NPV, the greater the shareholders wealth is enhanced. (Eddie M. 2003) Looking at Appendices E1.0 we can see that Synthetic Resin has a higher NPV and so we should choose to accept this project as it generates more wealth. Though there is a raking conflict that exists between NPV and IRR and we must use the crossover point to resolve this dilemma. This graph shows the NPV for both projects at a 10% discount rate NPV Curve illustrating the intersection of the NPV Curves (crossover point) and their respective IRR Values Calculations can be seen in Appendicle E1.1 Discount Rate Outcome <29.17% Accept Synthetic Resin 29.17%< discount rate<42.91% Accept Epoxy Resin >42.91% Reject Both The crossover point helps us dispute the IRR and NPV raking conflicts. Since we can only choose one project as they are mutually
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