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Payback Period
Discounted Payback Period
Net Present Value (NPV)
Internal Rate of Return (IRR)
Profitability Index (PI)
Payback Period- The Concept
What is it?
The payback period for a project is the expected
time it will take to recover the original investment.
We get:
X2 = 100,000,000 60,000,000
32 120,000,000 60,000,000
Answer:
Yes, since the payback period is less than 4 years.
Payback Period- The Pros
It is easy to calculate
It is easy to explain
We get:
Y3 = 100,000,000 96,318,557
43 116,808,961 96,318,557
Answer:
Yes, since the discounted payback period is less
than 5 years.
Discounted Payback Period-
The Pros & Cons
The pros and cons are almost the same as with the
basic payback period technique
0 -100,000,000 -100,000,000
1 20,000,000 18,181,818
2 40,000,000 33,057,851
3 60,000,000 45,078,888
4 30,000,000 20,490,404
5 10,000,000 6,209,213
Total 23,018,174
Answer:
Yes, since NPV > 0.
NPV Exercise
1. Calculate the NPV of the same project we just
looked at, this time using a discount rate of 20%.
Multiple IRRs
No real solution
Ranking projects
IRR- Projects with inflows first
The decision rule changes
PI = 123,018,174_ = 1.23
100,000,000
PI- Example contd
Answer:
Yes, since PI > 1.
PI- The Scale Problem
PI suffers same scale problem as IRR