Based on these numbers, Dave believes that the best approach to make the decisio

Question

Based on these numbers, Dave believes that the best approach to make the decision is the NPV approach. However, Eva is not so sure that ignoring the other metrics is a good idea. Which of the approaches or metrics would you propose? In other words, would you prefer one or more of these approaches over the others? Explain why.

Briefly state the limitations of the approach you used in making this decision, and outline what further analysis you would recommend

Metrics

Project A

Project B

Payback period (in years)

3.15

1.38

Discounted payback period (in years)

3.98

1.79

Net Present Value (NPV)

$612,847.22

$596,206.28

Internal Rate of Return (IRR)

35.93%

55.07%

Profitability Index

1.61

1.66

Modified Internal Rate of Return (MIRR)

32.04%

32.84%

Metrics

Project A

Project B

Payback period (in years)

3.15

1.38

Discounted payback period (in years)

3.98

1.79

Net Present Value (NPV)

$612,847.22

$596,206.28

Internal Rate of Return (IRR)

35.93%

55.07%

Profitability Index

1.61

1.66

Modified Internal Rate of Return (MIRR)

32.04%

32.84%

Explanation / Answer

Answer :-

(A) Pay back period - it shows in how many year it will take cash benefit to pay the original cost.

limitation:-

(B) Discounted pay back period ; it takes consideration of time value of money while evaluating the costa and benefit of a project.

(C) Net Present value (NPV) :- NPV described as the summation of present value of cash proceeds in each year minus the sum of present value of the cah outflows.

NPV > zero accept project

NPV < reject projects

limitation:-

in brief this method is Best.

(D) Internal rate of return :- IRR entirely depends upon the intial outlay and cah proceed of thr project which is being evaluated as accepetd or reject.

(F) profitability index :- it measures the present value of return per amount invested.

PI = present value of cash inflow / present value of cash outflow

(G) modified Internal RATE OF RETURN :- this method shows the reinvested of cash inflow in the firm and the intial outlay will be financed by the firm financing cost.

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