**FIN/571 Wk 3 – Using the Payback Method IRR and NPV **

**FIN/571 Wk 3 – Using the Payback Method IRR and NPV**

# FIN/571 Wk 3 – Using the Payback Method IRR and NPV

**Purpose of Assignment**

The purpose of this assignment is to allow the student to calculate the project cash flow using net present value (NPV), internal rate of return (IRR), and the payback methods.

**Assignment Steps **

**Create** a 350-word memo to management including the following:

- Describe the use of internal rate of return (IRR), net present value (NPV), and the payback method in evaluating project cash flows.
- Describe the break-even point and its importance.
- Describe the advantages and disadvantages of each method.

**Calculate **the following time value of money problems:

- If you want to accumulate $500,000 in 20 years, how much do you need to deposit today that pays an interest rate of 15%?
- What is the future value if you plan to invest $200,000 for 5 years and the interest rate is 5%?
- What is the interest rate for an initial investment of $100000 to grow to $300000 in 10 years?
- If your company purchases an annuity that will pay $50,000/year for 10 years at a 11% discount rate, what is the value of the annuity on the purchase date if the first annuity payment is made on the date of purchase?
- What is the rate of return required to accumulate $400,000 if you invest $10,000 per year for 20 years. Assume all payments are made at the end of the period.

**Calculate** the project cash flow generated for Project A and Project B using the NPV method.

- Which project would you select, and why?
- Which project would you select under the payback method? The discount rate is 10% for both projects.
- Use Microsoft
^{®}Excel^{®}to prepare your answer. - Note that a similar problem is in the textbook in Section 5.1.

## FIN/571 Wk 3 – Using the Payback Method IRR and NPV

**FIN/571 Wk 3 – Using the Payback Method IRR and NPV**

# FIN/571 Wk 3 – Using the Payback Method IRR and NPV

**Purpose of Assignment**

The purpose of this assignment is to allow the student to calculate the project cash flow using net present value (NPV), internal rate of return (IRR), and the payback methods.

**Assignment Steps **

**Create** a 350-word memo to management including the following:

- Describe the use of internal rate of return (IRR), net present value (NPV), and the payback method in evaluating project cash flows.
- Describe the break-even point and its importance.
- Describe the advantages and disadvantages of each method.

**Calculate **the following time value of money problems:

- If you want to accumulate $500,000 in 20 years, how much do you need to deposit today that pays an interest rate of 15%?
- What is the future value if you plan to invest $200,000 for 5 years and the interest rate is 5%?
- What is the interest rate for an initial investment of $100000 to grow to $300000 in 10 years?
- If your company purchases an annuity that will pay $50,000/year for 10 years at a 11% discount rate, what is the value of the annuity on the purchase date if the first annuity payment is made on the date of purchase?
- What is the rate of return required to accumulate $400,000 if you invest $10,000 per year for 20 years. Assume all payments are made at the end of the period.

**Calculate** the project cash flow generated for Project A and Project B using the NPV method.

- Which project would you select, and why?
- Which project would you select under the payback method? The discount rate is 10% for both projects.
- Use Microsoft
^{®}Excel^{®}to prepare your answer. - Note that a similar problem is in the textbook in Section 5.1.

## FIN/571 Wk 3 – Using the Payback Method IRR and NPV

FIN/571 Wk 3 – Using the Payback Method IRR and NPV