Prompt: Consider the financial project through the lens of the four investment decision rules.

Scenario: Suppose you have the opportunity to buy into a restaurant business. The initial cost to you is $1,000,000. Looking at the financials, you determine that the business will return a profit of $100,000 per year, forever. Assume the initial $1,000,000 outlay occurs immediately (today), and the flow of $100,000 profits comes to you at the end of each year going forward. Assume the discount rate is 5%.

Step One: Calculate NPV.

Step Two: Calculate the IRR.

Step Three: Calculate the payback period.

Step Four: Calculate the PI.

Question One: Using the four investment decision rules, determine whether or not to move forward with the project. Justify your answer.

Scenario: Fictional organization, ABC Company, is considering two alternative investments, Project One and Project Two.

Project One Initial Cost: $1,000,000 Annual Cash Flow: $200,000 for 10 years Discount Rate: 0.05

Project Two Initial Cost: $5,000,000 Annual Cash Flow: $300,000 (forever) Discount Rate: 0.05

Step One: Calculate NPV for each project.

Step Two: Calculate the IRR for each project.

Step Three: Calculate the payback period for each project.

Step Four: Calculate the PI for each project.

Question Two: Which project would you invest in, Project One or Project Two? How does each decision rule lead you to your specific decision?