Question

NPV, the IRR method, the payback rule, or the discounted payback rule. In your answer define and describe each method, using formulas

Answer 1

NPV is the sum of present value of all the cash inflows and cash outflows.

.NPV = CF0 + CF1/((1+r)^1) + CF2/((1+r)^2)

IRR is the interest rate at which the NPV is equal to 0.

NPV = 0 = CF0 + CF1/((1+IRR)^1) + CF2/((1+IRR)^2)

Payback period is number of years it takes to recover the investment.

Payback period = full years untill recovery + (Unrecovered cost at the beginning of the last year/cash flow in during the last year)

Discounted Payback period is exactly the same as Payback period but instead of using the Cash flows we use the discounted cash flows

Discounted Payback period = full years untill recovery + (Unrecovered cost at the beginning of the last year/cash flow in during the last year)