Strategic decision makers are required to be able to evaluate projects based on the firm's long-term objectives as well as the project's ability to earn the company additional compensation. The 3 main tools used are the payback period, net present value, and internal rate of return.
Year
Project 1
Project 2
Project 3
0
($30,000)
($32,000)
($35,000)
1
$11,000
$15,000
$11,000
2
$11,000
$14,000
$11,000
3
$11,000
$11,000
$11,000
4
$11,000
$2,000
$11,000
5
$11,000
$500
$11,000
Project
NPV rate
1
5%
2
5.5%
3
6%
Answer the following questions using the data in the charts above:
Calculate the net present value for each project using each project's NPV rate. Show your work.
Calculate the payback period for each project. Show your work.
Calculate the internal rate of return for each project. Show your work.
Which project would the company select using the net present value method in project 1? Explain your answer.
Which project would the company select using the net present value method in project 2? Explain your answer.
Which project would the company select using the net present value method in project 3? Explain your answer.
Which project would the company select using the payback period? Explain your answer.
Which project would the company select using the internal rate of return method? Explain your answer.