Strategic decision makers are required to be able to evaluate projects based on the long-term objectives of the firm as well as the project's ability to earn the company additional compensation. The 3 main tools used to make this evaluation are the pay-back period, net present value (NPV), and internal rate of return (IRR).
|
Year
|
Project #1
|
Project #2
|
Project #3
|
|
0
|
($30,000)
|
($32,000)
|
($35,000)
|
|
1
|
$11,000
|
$15,000
|
$11,000
|
|
2
|
$11,000
|
$14,000
|
$11,000
|
|
3
|
$11,000
|
$11,000
|
$11,000
|
|
4
|
$11,000
|
$2,000
|
$11,000
|
|
5
|
$11,000
|
$500
|
$11,000
|
|
Scenario
|
NPV Rate
|
|
1
|
5%
|
|
2
|
5.5%
|
|
3
|
6%
|
Using the data in the tables above, answer the following questions:
- Calculate the NPV for each project using each scenario's NPV rate. Show your work.
- Calculate the pay-back period for each project. Show your work.
- Calculate the IRR for each project. Show your work.
- Which project would the company select using the NPV method in scenario 1? Explain your answer.
- Which project would the company select using the NPV method in scenario 2? Explain your answer.
- Which project would the company select using the NPV method in scenario 3? Explain your answer.
- Which project would the company select using the pay-back period? Explain your answer.
- Which project would the company select using the IRR method? Explain your answer.