Chapter 7 introduces you to three methods to evaluate large-dollar, multi-year investment decisions: payback, net present...

Chapter 7 introduces you to three methods to evaluate large-dollar, multi-year investment decisions: payback, net present value, and internal rate of return. What the strengths and weaknesses of each method in a health care environment? Please provide an example for each presented in the text or another source that you find. What method do you feel is the most effective and why?

Solutions

Expert Solution

Payback period : Payback period is the period the project takes to recover the initial investment. It is a measure of liquidity of a project and a non-discounting technique. It is helpful in analyzing how quick a project can recover its initial investment. This project does not use time value of money and does not consider the cash flows after the payback period date.

Net present value is the difference between present value of subsequent cash flows and the initial investment. This method uses the time value of money concept and calculates net addition in the shareholder’s wealth. Net present value is very complex to calculate and the selection of discount rate is a subjective decision.

Internal rate of return is the discount rate at which the net present value of the project will be zero. IRR method considers the time value of money concept but it assumes that the cash flows will be reinvested at the IRR rate. IRR is also difficult to calculate.

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

Explain how IRR, Net Present Value and payback period can be used to evaluate capital decisions....

Explain how IRR, Net Present Value and payback period can be used to evaluate capital decisions. What are some problems with IRR? Explain what each metric actually measures and how those measurements can be used in decision making.

Chapter 8 discussed the following investment criteria: net present value, payback, profitability index, average accounting return,...

Chapter 8 discussed the following investment criteria: net present value, payback, profitability index, average accounting return, and the internal rate of return. Which one of these is the most valuable from a financial point of view and why?

Net Present Value and Other Investment Criteria Payback Period - Concerning payback: a. Describe how the...

Net Present Value and Other Investment Criteria Payback Period - Concerning payback: a. Describe how the payback period is calculated, and describe the information this measure provides about a sequence of cash flows. What is the payback criterion decision rule? b. What are the problems associated with using the payback period to evaluate cash flows? c. What are the advantages of using the payback period to evaluate cash flows? Are there any circumstances under which using payback might be appropriate?...

What are the payback and NPV (net present value) methods of evaluating capital projects? Which is...

What are the payback and NPV (net present value) methods of evaluating capital projects? Which is considered the best evaluation method, and why is one better than the other?

Problem 16-21 Using net present value and payback period to evaluate investment opportunities LO 16-2, 16-4...

Problem 16-21 Using net present value and payback period to evaluate investment opportunities LO 16-2, 16-4 Daryl Kearns saved $240,000 during the 30 years that he worked for a major corporation. Now he has retired at the age of 60 and has begun to draw a comfortable pension check every month. He wants to ensure the financial security of his retirement by investing his savings wisely and is currently considering two investment opportunities. Both investments require an initial payment of...

computer plz The concept of present value is used to evaluate and make the investment decisions...

computer plz The concept of present value is used to evaluate and make the investment decisions by investors. This criteria of discount rate and present value is used to make decision to select appropriate investment projects. If you have 2 investment projects with the same costs as the following: First: For the first project total revenue at the end of every year is $1575 and the interest rate is 7.5%. Second: For second project, total revenue at the end of...

Donahue Industries Inc. wishes to evaluate three capital investment projects by using the net present value...

Donahue Industries Inc. wishes to evaluate three capital investment projects by using the net present value method. Relevant data related to the projects are summarized as follows: Product Line Expansion Distribution Facilities Computer Network Amount to be invested $790,052 $535,506 $310,018 Annual net cash flows: Year 1 413,000 301,000 186,000 Year 2 384,000 271,000 128,000 Year 3 351,000 241,000 93,000 Present Value of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 0.943 0.909 0.893 0.870 0.833 2...

Find an article where one of the methods of capital budgeting (net present value, payback period,...

Find an article where one of the methods of capital budgeting (net present value, payback period, profitability index, etc ) is used by a company for a project and the result of the project. Based on the method used, did the company move forward with the project or dissolve the project? Your blog must be 300-500 words.

Calculate the net present value, internal rate or return and payback period for an investment project...

Calculate the net present value, internal rate or return and payback period for an investment project with the following cash flows using a 5 percent cost of capital: Year 0 1 2 3 Net Cash Flow -$150,000 $62,000 $62,000 $62,000 Do you recommend the investment?

discuss the reasons why net present value is used to make investment decisions.

Subjects