Question

Elk Enterprise is in the process of selecting which of the following mutually exclsuive projects it should invest in. Date for each project is listed below. Elk's cost of capital is 9.9% and its target payback threshold is 2.4 years

discounted payback NPV MIRR

Project 1 2.4 years $10,250 10.1%

Project 2 2.1 years $6,890 10.2%

Project 3 1.1 years $7,220 12%

Project 4 0.7 years $1,330 23.3%

Should each project be accepted and rejected???

Answer 1

Payback period - A project should be accepted if the discounted payback period is less than the payback period threshold.

NPV - A project should be accepted if the NPV is greater than zero or positive.

MIRR - A project should be accepted if the MIRR is greater than the project's cost of capital.

From the given values, all the projects can be accepted, because the discounted payback peiod is less than 2.4 years, NPV is positive in all cases, and MIRR is greater than 9.9% for all the projects.