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%. Use this template  Download template to fill out your responses. 

Step One: Calculate NPV.

Step Two: Calculate the IRR.

Step Three: Calculate the payback period.

Step Four: Calculate the PI.

Note: While NPV and IRR rules tell you whether or not to move forward with a project, you can gather additional insights by also calculating the payback period and PI. The payback period and PI are used to rank projects. Hence, for these two to be useful, you would want to evaluate more than one project.

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

 

Part Two

Prompt: Evaluate an investment decision among two projects according to the four investment decision rules.

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?

Answer rating: 100% (QA)

Question One Using the four investment decision rules determine whether or not to move forward with the project Justify your answer To evaluate the project using the four investment decision rules let... View the full answer