Question

Access Part II of the IG009 Assessment Scenarios document. As the new product development manager, you are considering investment proposals for two mutually exclusive investment opportunities. The two proposals must be evaluated using net present value (NPV), accounting rate of return (ARR), internal rate of return (IRR), and payback. Review the cash flow information in the “Investments” section of the Assessment Scenarios document, and then analyze the investment proposals using Excel or another spreadsheet software to calculate NPV, ARR, IRR, and payback. Write a report that presents your findings (1–2 pages).

Your report should include the following:

• Your calculations of NPV, payback, IRR, and ARR
• An evaluation of each of the investment opportunities
• Your recommendation for which investment opportunity should yield the highest

Note: Part II requires you to submit an Excel sheet tab and a section in Word. Be sure each is clearly labeled when you submit your Assessment.

Part II: Making Investment Decisions Using NPV, ARR, IRR, and Payback

Investments

	Investment A	Investment B
Required Investment	$50,000	$150,000
Annual Cash Flows	20,000	56,000
Annual Net Income	8,000	34,000
Project Life	5 years	5 years
Cost of Capital	10%	10%

Answer 1

Solution:

Investment A
Year	CashFlows	PV Factor @10%	PV
0	-50000	1.0000	-50000.00
1	20000	0.9091	18181.82
2	20000	0.8264	16528.93
3	20000	0.7513	15026.30
4	20000	0.6830	13660.27
5	20000	0.6209	12418.43
NPV			25815.74
PayBack	=20000/50000		2.50
IRR			28.65%
ARR	=8000/50000		16.00%
PI	=PV of cash Flows / Initial Investment		1.52
Investment B
Year	CashFlows	PV Factor @10%	PV
0	-150000	1.0000	-150000.00
1	56000	0.9091	50909.09
2	56000	0.8264	46280.99
3	56000	0.7513	42073.63
4	56000	0.6830	38248.75
5	56000	0.6209	34771.59
NPV			62284.06
PayBack	=56000/150000		2.68
IRR			25.19%
ARR	=34000/150000		22.67%
PI	=PV of cash Flows / Initial Investment		1.42

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