Chapter 26, Problem P26.33APGA

To determine

Concept Introduction:

Net Present Value (NPV): NPV is a measurement of the profit of the any project or business. NPV is calculated by the net present value of cash inflow during the life of the asset, minus net present value of cash outflow (including initial investments).

Accounting Rate of Return (ARR): The accounting rate of return is the amount of return, investor can expect from investment made. ARR calculates by dividing the average profit by average investment. It is also account “Average Rate of Return”.

Internal Rate of Return (IRR): IRR is the discounting rate at which the present value of cash inflow will be equal to the present value of cash outflow. At, IRR net present value of an investment will be zero.

Payback: The payback period or payback is the period of time required to recover the cost of investment or capital outlay. The shorter the payback period, the investment will be more attractive. It is calculated by dividing total investment by expected annual cash flow.

1.

To Calculate: The IRR and NPV for Option Alpha and Beta and find which option should be pursued.

To determine

2.

To Explain: The relationship between IRR and NPV and based on this relationship judger the answer given in solution 1.

To determine

3.

To Calculate: The IRR and NPV for Option Alpha and Beta, based on revised initial cost.