Chapter 10, Problem 10.1STP

a)

Summary Introduction

To determine: Payback period of each project.

Introduction:

Every investment requires a time period to pay back the cost of investment. The time period taken to compensate the investment costis known as the payback period.

b)

Summary Introduction

To determine: The Net Present Value for each project.

Introduction:

The difference between the present value of cash inflows and the present value of cash outflows for a particular period is known as the Net Present value.

$\begin{array}{c}NPV=\frac{{\text{CF}}_1}{{\left(\text{1}+r\right)}^1}+\frac{{\text{CF}}_2}{{\left(1+r\right)}^2}+\frac{{\text{CF}}_3}{{\left(1+r\right)}^3}+\frac{{\text{CF}}_4}{{\left(1+r\right)}^4}-I0\\ \end{array}$

c)

Summary Introduction

To determine: The Internal rate of return for each project.

Introduction:

Internal Rate of Return is a measure used in the capital budgeting, which estimates the profitability of possible investments. IRR is computed as a discount rate, which makes the net present value of all cash flows from an investment as zero.

$NPV=\frac{{\text{CF}}_1}{{\left(\text{1}+r\right)}^1}+\frac{{\text{CF}}_2}{{\left(1+r\right)}^2}+\frac{{\text{CF}}_3}{{\left(1+r\right)}^3}+\frac{{\text{CF}}_4}{{\left(1+r\right)}^4}-I0$

d)

Summary Introduction

To summarize: The payback period, NPV and internal rate of return for Project M and Project N.

Introduction:

Every investment requires a time period to pay back the cost of investment. The time period taken to compensate the investment cost is known as the payback period. The difference between the present value of cash inflows and the present value of cash outflows for a particular time is known as the Net Present value.

Internal Rate of Return is a measure utilized in the capital budgeting which estimates the profitability of possible investments. IRR is computed as a discount rate, which makes the net present value of all cash flows from an investment as zero.

e)

Summary Introduction

To determine: The net present value profiles of the two projects.

Introduction:

The difference between the present value of cash inflows and the present value of cash outflows for a particular time is known as the Net Present value. NPV profile is a graphical depiction of the NPV of a project at different discount rates.