Capital Budgeting Payback Method Simplest How long does it take to recover your investment? Internal Rate of Return The percentage rate of return a project will earn Net Present Value (NPV) Does the project meet the hurdle rate? Exercises 1. An investment in a robotics system of $75,000 will save us a net total of $22,400 per year after tax in operational expenses Payback NPV @ 8% (hurdle rate) IRR 2. An investment of $100,000 in a new server and software system will net us a savings of $20,540 per year after tax including Payback - NPV@ 8% (hurdle rate) 3. John needs a new production machine for operations. The machine cost is $250,000 Estimated life is 7 years Additional revenue is expected to be $30,000, net of tax, per year (based upon 1,000 additional widgets produced per run) Additional efficiency labor savings per time study is $17,600 per year Additional tax savings from depreciation based upon a tax rate of 35% calculated on a straight line basis Payback- NPV @ 8% (hurdle rate)