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In: Accounting

You are newly hired as an accountant for the Hill Business Technologies, Inc., a small service...

You are newly hired as an accountant for the Hill Business Technologies, Inc., a small service business that has no formal capital budgeting system. The president of your company, Janice Hill, has requested that you write a memo to her explaining what the net present value method of investment evaluation is, how it differs from the payback period method of investment evaluation is, how it differs from the payback period method, and why Hill Business Technologies should use the net present value method for capital budgeting purposes instead of the payback method

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Date-03/03/2018

Janice Hill

President

Hill Business Technologies, Inc.,

Sub: Capital budgeting methods of investment evaluation

I have been asked to analyze and prepare a note on NPV and payback methods of investment evaluation.

NPV (Net present value method) helps investment manager evaluate investments to determine whether to accept the investment or not. It is derived by calculating present value of future cash flows of the project based on required rate of return. If the NPV is positive, project is accepted and otherwise it is rejected.

Payback period determines the period in which the initial outflow will be recovered. Project is accepted, if the payback period is lesser than required payback period.

Payback method does not consider cash flows occurring after payback period whereas NPV method takes into consideration all cash flows.

NPV is best capital budgeting method available to evaluate investment decisions as it takes into consideration all cash flows occurring over the life of the project.

Please do let me know in case you have any comments.

Yours Sincerely

(your name)

Accountant

ekkarill92 answered 1 year ago
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