Chapter 21, Problem 21.30E

1 (a)

To determine

Net Present Value (NPV):

NPV is a technique used in capital budgeting to see the project is profitable for the company or not. The acceptance of the project is based on the result of NPV as if it is positive then it should be selected and in the case of negative NPV it should be rejected.

Payback period:

It is ascertained when cost of project is divided by the annual cash flows of the respective project. The payback period is a method used in capital budgeting. It does not involve the time value of money factor.

Discounted payback period:

Discounted payback period is the time period in which the company earns back their investment. It is use to determine whether to take this project or not. In this, cash inflow is adjusted according to time value of money.

Internal Rate of Return (IRR):

IRR is a capital budgeting technique that involves the time value of money concept. The IRR percentage gives the idea about the profitability arises from an investment. The IRR of a project is calculated with the help of NPV calculations.

To compute: The NPV.

1 (b)

To determine

To compute: Payback period.

1 (c)

To determine

To compute: The discounted payback period

1 (d)

To determine

To compute: IRR

2.

To determine

To explain: The comparison and contrast the capital budgeting method.