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Bert has just been hired by your company as a summer co-op student and has been assigned

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Bert has just been hired by your company as a summer co-op student and has been assigned to assist you. Bert is puzzled about why your company is calculating IRR and payback periods for investment projects. According to Bert’s finance textbook, NPV gives the best measure of the impact of a project on shareholder wealth.
a. Explain to Bert the advantages and disadvantages of payback and IRR.
b. Which evaluation techniques are the most popular with companies (i.e., your company’s clients)?
c. Given the disadvantages and limitations of payback and IRR, why do you think so many CFOs continue to use them as criteria for evaluating projects?

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a Payback period Determines how long it takes for the project cash flows to add up to the investment ...View the full answer


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Related Book For  book-img-for-question
Introduction To Corporate Finance

Introduction To Corporate Finance

ISBN: 9781118300763

3rd Edition

Authors: Laurence Booth, Sean Cleary

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Related Video

NPV stands for \"Net Present Value,\" which is a financial concept used to determine the value of an investment or project. It measures the difference between the present value of cash inflows and the present value of cash outflows over a given period of time, using a specific discount rate. To calculate the NPV of an investment, you need to first estimate the cash inflows and outflows associated with the investment, and then discount them back to their present values using a discount rate. The discount rate represents the cost of capital or the expected rate of return required by investors. The formula for calculating NPV is: NPV = sum of (cash inflows / (1 + discount rate)^t) - sum of (cash outflows / (1 + discount rate)^t) Where: Cash inflows: the expected cash received from the investment Cash outflows: the expected cash paid out for the investment Discount rate: the required rate of return or the cost of capital t: the time period in which the cash flow occurs If the NPV is positive, it means that the investment is expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a good investment. If the NPV is negative, it means that the investment is not expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a bad investment.

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