Question 4 Pepper Properties screens various projects using payback period metho

Question

Question 4 Pepper Properties screens various projects using payback period methods. For renovations decisions, the minimum acceptable payback period is five years Renovation projects are characterized by an immediate investment of p dollars which is recouped as an annuity of A dollars per year over 20 years They are considering changing to the IRR method for such decisions 1f they changed to the TRR method, what MARR would result in exactly the same decisions as their current policy using payback period?

Explanation / Answer

If the company changed to IRR method , then the internal rate of return which is greater than the established minimum acceptable rate of return or cost of capital would be accepted by the firm to go ahead with the renovation decision .

As the recouping of the projetc takes 20 years , the cash flows for the renovation project would be important which will clearly establish the returns in investment for the renovation decision.

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