You have been asked to evaluate the financial viability of three investment opti

Question

You have been asked to evaluate the financial viability of three investment options for your company. You are asked to use the Simple Payback, IRR, and NPV methods to evaluate the options and make a recommendation on which of them, if any, to proceed with. The selection of any option is mutually exclusive. Perform simple payback, IRR, and NPV analyses on the investment options. The expected nominal cashflows for Years 1 through 5 produced by each investment option are provided in the table below. The initial amount required for all three investment options is $10,000. For the NPV analysis assume a cost of capital of 10% p.a. For the IRR analysis assume the minimum rate of return required for any option to be considered viable is 15% p.a. Which investment option, if any, would you recommend and why?

Explanation / Answer

Payback option 1 = 2 years option 2= 2.4 years According to payback option 1 is recommended since its payback period is less than option 2 NPV option 1= 297.856 option 2: $3286.04 According to NPV, option 2 is recommended since its NPV is more than option 1 IRR option 1= 12.12% option 2= 23.5% According to IRR, option 2 is recommended since its IRR is more than the requried% of 15%.

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