Investment Decisions Analysis - Assignment Example

Investment Decisions Investment Decisions A. Payback period (PBP i. Project D must be given preference based on the payback period. ii. Payback period does not take into account the time value of money. The method does not include cash flows outside the payback period. iii. The payback period is simple, easy to compute and understand. B. Internal rate of return (IRR): i. Project A must be chosen based on the IRR because it yields the highest IRR. ii. The major drawback of using the highest IRR to choose a project is that it becomes difficult when dealing with mutually exclusive projects. iii. IRR ignores the size of the project, magnitude of investment and also fails to reveal information about investment proportion percentage return. iv. No, failure to limit project size will mean no project is chosen because project B’s IRR is less than its cost of capital, which is 10 percent.

According to IRR, a project is chosen when its IRR is greater than its capital cost, hence project B is cannot be selected. C. Net Present Value (NPV): From the available information, project C must be preferred over project A because project C’s NPV is higher than that of A with its IRR more than the capital cost.