Question

create a 350 word memo for management
describe the use of internal rate of return, net present value, and payback method in evaluating cash flows.
describe the advantages and disadvantages of each method.
calculate:
1 if you want to accumulate $500,000 in 20 years, how much you need to deposit today that pays interest rate of 15%.

2. what is the future value if you plan to invest $200,000for 5 years and the interest rate is 5%.

3. what is the interest rate for an initial investment of $100,000 to grow to $300,000 in 10 years.

4. if your company purchases any annuity that will pay $50,000 per year for 10 years at 11% discount rate, what is the value of the annuity on the purchase date if the first annuity payment is made on the date of the purchase.

5. what is the rate of return required to accumulate $400,000, if you want to invest $10,000 per year for 20 years. assume all payments are made at the end of the period.

calculate:
the project cash flow generated for project A and project B.

1. which project would you select and why?
2.which project would you select under payback method if the discount rate is 10% for both projects?
Use Microsoft Excel!!!!

Project A:
initial investment is $10,000
year 1 $5,000
year 2 $5,000
year 3 $5,000

Project B:
initial investment is $55,000
year 1 $20,000
year 2 $20,000
year 3 $20,000

Answer 1

1-	Present value	fv/(1+r)^n r = 15%	500000/(1.15)^20	30550.14
2-	Future value	pv*(1+r)^n	200000*(1.05)^5	255256.3
3-	Interest rate	(fv/pv)^(1/n)	(300000/100000)^(1/10)-1	11.61%
4-	present value of annuity	Using present value function in MS excel	pv(rate,nper,pmt,fv,type)	rate =115 nper =10 pmt =50000 fv =0 type =1	PV(11%,10,50000,0,1)	($326,852.38)
5-	rate of return	Using rate function in MS excel	rate(nper,pmt,pv,fv,type)	nper =20 pmt =-10000 pv =0 fv =400000 type =0	RATE(20,-10000,0,400000,0)	6.77%
6-
	Year	cash flow	present value of cash flow = cash flow/(1+r)^n r= 10%
	0	-10000	-10000
	1	5000	4545.455
	2	5000	4132.231
	3	5000	3756.574
	Net present value = sum of present value of cash flow		2434.26
	Payback period	Initial investment/annual cash flow	10000/5000	2
	Year	cash flow	present value of cash flow = cash flow/(1+r)^n r= 10%
	0	-55000	-55000
	1	20000	18181.82
	2	20000	16528.93
	3	20000	15026.3
	Net present value = sum of present value of cash flow		-5262.96
	Year	cash flow	accumulated cash flow
	0	-55000
	1	20000	20000
	2	20000	40000
	3	20000	15000	amount to be recovered
	Payback period = year before final year of recovery+(amount to be recovered/net operating cash flow of final year of recovery)	2+(15000/20000)	2.75
	On the basis of NPV project A should be selected
	On the basis of Payback period Project A should be selected

MEMO

Internal rate of return refers to a rate at which NPV of the investment is zero and sum of present value of cash inflow equals to cash outflow. it is a rate which is used as a selection tool in capital budgeting which is compared with the minimum required rate and a comparison is made about the return that should be earned. One disadvantage of IRR is that it is based on assumption that cash flows are reinvested at rate equal to IRR, in actual which is not practically possible.

NPV is a method of capital budgeting which is used to find out the excess of return over the cost in present value terms. it is commonly used method of capital budgeting and it tells us the excess of present value of cash inflow over outflow. Biggest advantage of NPV is that it uses time value of money concept while One difficulty associated with the NPV method is the estimation of cash flows required rate of return.

Payback period is the method which is used to measure the time required to recover the initial investment. It is simple to calculate but biggest disadvantage with Pay back period is that ignores time value of money and ignores the cash flow after the recovery of initial investment