Attached is the prior work done on a excel sheet for this course to show what this assignment needs to be compared too. The assignment instruction are below

"This time you will compare the projects using the Modified IRR technique.Assume that the reinvestment rate for both projects is 5%. "

To get full credit please do the following:

Define the technique.

Discuss the difference between this method and the others we have used so far (Payback Method, Discounted Payback Period, NPV Method)

Analyze the numbers in the problem using an excel spreadsheet.

You must use Excel formulas which are on the ribbon in Excel marked Fx to make your calculations whenever possible. Do not write your own formulas unless absolutely necessary.

All information must be in Excel

*Please summarize in detail what this project is showing .*

1. Define t the technique Payback period measures the length of time required to recover an initial investment. It is an important tool that can be used to determine whether a project is worth the time and resources to undertake. There are some limitations to the Payback Period. Payback period ignores the cash flows beyond the Payback Period. It also ignores the long-term profitability of a project. Key Terms: time value of money: Value of money, allowing for a given amount of interest, earned over a given amont of time. cost of capital: the rate of return that capital could be expected to earn in an alternative investment of equivalent risk. opportunity cost: cost of an opportunity forgone (and the loss of the benefits that could be received from that opportunity); the most valuable forgone alternative. Summary Often used because of it is easy to apply and understand for most individuals. Considered a method of analysis with serious limitations and qualifications for its use, does not account for time value of money, risk, financing or opportunity cost. Generally expressed in years. First calculate net cash flow for each year, net cash flow year one = cash inflow year one - cash outflow year one. Then cumulative cash flow = (net cash flow year one + net cash flow year two + net cash flow year three. Accumulate by year until cumulative cash flow is a positive number, then we have the payback year. 2. Analyze the numbers in the problem using an excel spreadsheet. Payback Method Year Project A Project B 2014 ($3,000,000) ($3,000,000) 2015 $0 $975,000 2016 $600,000 $975,000 2017 $900,000 $975,000 2018 $2,700,000 $975,000 Project A Cash Flow Year 0 ($3,000,000) 1 2 3 4 0 600000 900000 2700000 Cumulative Cash Flow ($3,000,000) ($2,400,000) ($1,500,000) $1,200,000 1500000/2700000= 0.555556 The Initial Investment will be paid back in 3.55 years Project B Cash Flow Cumulative Cash Flow Year 0 1 2 3 4 ($3,000,000) $975,000 $975,000 $975,000 $975,000 ($2,025,000) ($1,050,000) ($75,000) $900,000 75000/975000= 0.08 The Initial Investment will be paid back in 3.08 years Analysis of the Payback Period between Project A and Project B Based on the numbers calculated as it relates to the Payback Period, it is clear that project B should be the project of choice. The Payback Period for project A is approximately 3.55years, whereas the Payback period for project B is approximately 3.08years. Even though the ultimate profit from the initial investment of $3,000,000 for project A is $1,200,000, which is greater than the $900,000 that will be realized for project B; the better option will still be to accept project B based on the shorter Payback Period. References https://www.youtube.com/watch?v=ZfbzF49SyPo http://financialmemos.com/discounted-payback-period-method-calculation-with-examples/ Defining the Payback Method - Boundless Open Textbook. (n.d.). Retrieved from https://www.boundless.com/finance/textbooks/boundless-finance-textbook/capital http://www.investopedia.com/ pital-budgeting-11/the-payback-method-92/defining-the-payback-method-396-6416/ Question 1 Discounted Payback Period When considering the various investment options, management needs to take into account how long it will take (the number of years) to recover the initial investment before approving an investment. In addition to knowing how long it takes to recover the initial investment, management must take into account the time value of money (one dollar today is not equal in value to one dollar five years from now). The Discounted payback method accounts for inflation, interest and other matters that affects the time value of money in an investment; therefore, an investment decision is made in which cash flows are discounted at an interest rate that determines how long it will take for the sum of the discounted cash flows to equal the initial investment and that is worthwhile for the investor. Define the technique Discounted Payback Method Year Project A Project B 2014 ($3,000,000) ($3,000,000) 2015 $0 $975,000 2016 $600,000 $975,000 2017 $900,000 $975,000 2018 $2,700,000 $975,000 Discount Rate: 10% PROJECT A Year 0 Cash Flow Present Value Cash Flow ($3,000,000) 1 2 3 4 0 600000 900000 2700000 ($3,000,000) $0 $495,868 $676,183 $1,844,136 Balance ($3,000,000) ($3,000,000) ($2,504,132) ($1,827,949) $16,187 3.99 years Discounted Payback Period for Project A is 3.99 years PROJECT B Cash Flow Present Value Cash Flow ($3,000,000) ($3,000,000) $886,364 $805,785 $732,532 $665,938 Balance Year 0 1 2 3 4 $975,000 $975,000 $975,000 $975,000 ($3,000,000) ($2,113,636) ($1,307,851) ($575,319) $90,619 3.86 years Discounted Payback Period for Project B is 3.86 years Analysis of the Discounted Payback Period between Project A and Project B Based on the numbers calculated as it relates to the Discounted Payback Period, it is clear that Project B should be the project of choice. The Discounted Payback Period for project A is approximately 3.99years, whereas the Payback period for project B is approximately 3.86years. Also the ultimate profit from the initial investment of $3,000,000 for project A is only $16,187, which is less than the $90,619 that will be realized for project B after 4 years; the better option would be to accept project B based on the shorter Discounted Payback Period and greater profit. Difference between the two methods Payback Method The payback period of an investment functions as a crucial determining factor in whether or not a company will make the investment. The payback period is typically calculated as a ratio of the cost of the investment and the annual income amount projected from that investment. Investments with shorter payback periods are more appealing, while those with longer payback periods are less rewarding. Discount Payback Method Since the calculation of discounted payback period also involves the calculation of compound inflation, the process is not as straightforward as that for the standard payback period. the discounted payback period functions in much the same way as the standard payback period, the discounted payback period accounts for the "time value of money." The time value of money Refrence: http://www.investopedia.com/terms/d/discounted-payback-period.asp http://smallbusiness.chron.com/payback-period-vs-discount-payback-period-81299.html y means that money now is more valuable than the same amount of money in the future Define the technique Net present Value technique is one of the discounted cash flow techniques, which takes into account the time value of money .NPV refers to the difference between the present value of all cash inflows and the present value of all cash outflows associated with the project .The present value is ascertained using the firm's overall cost of capital as the discount rate. If the net present value is positive then the project is accepted otherwise rejected. Therefore, mangers should select that project which gives the positive net present value. Formula for calculating NPV All the cash flows has been multiplied by the present value @ 10% and product of all the present values have been added to find the NPV The following is the formula for calculating NPV: Where Ct = net cash inflow during the period t Co = total initial investment costs r = discount rate, and t = number of time periods In this question as the NPV is Positive but the NPV of project B is more as compared to Project A (Calculations have been shown in excel) therefore ,the project B should be accepted. Following are the differences between NPV, payback method and discounted payback period. 1) The net present value (NPV) is the present value of the future cash flows after tax less initial investment outlay. A project's payback period reflects the number of periods that a project will take In order to recover its initial cash outlay. Whereas discounted payback period discounts the project's present value of future cash flows to reflect the number of periods that a project will take In order to recover its initial cash outlay. 2) Investment rule according to this technique is :- : Invest if NPV>0 and Do not invest if NPV