Strategic decision makers are required to be able to evaluate projects based on the long-term objectives of the firm as well as the projectâ€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.
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