25.6. Comparative Analysis of Techniques

Try these first

1. 1.

   What does the Payback Period measure?

   Hint

   Think about the initial investment and how long it takes to get that back.

2. 2.

   What does the Profitability Index indicate?

   Hint

   What does it mean if the PI is greater than one?

3. 3.

   What does the Payback Period ignore?

   • Cash flows after recovery
   • Initial investment
   • Discount rate

   Hint

   Think about how long it takes to recoup your money.

4. 4.

   True or False: The Internal Rate of Return considers the time value of money.

   • True
   • False

   Hint

   Consider how IRR is calculated.

5. 5.

   A company has two projects to consider: Project A costs $150,000 and is expected to provide cash inflows of$60,000 each year for 3 years. Project B costs $150,000 and is expected cash inflows of$70,000 in years 1 and 2, and $20,000 in year 3. Calculate both projects’ NPV at a discount rate of 8% and identify which project to accept.

   Hint

   Utilize the NPV calculation method learned previously.

6. 6.

   If a project requires an initial investment of $200,000 and offers a return of$50,000 for the first three years, then an amount of $10,000 for the last two years, what is the project's Payback Period and why might it be a risky investment?

   Hint

   Consider annual cash inflows and the return compared to the initial investment.