16.1 Payback Period Method The payback period is the simplest project evaluation method. It is the time it takes the company to recoup its initial investment. Its usefulness is limited, however, because it ignores the time value of money. 16.2 Net Present…

Learning Outcomes By the end of this section, you will be able to: A Microsoft Excel spreadsheet provides an alternative to using a financial calculator to automate the arithmetic necessary to calculate NPV and IRR. An advantage of using Excel is that…

Learning Outcomes By the end of this section, you will be able to: So far, we have considered methods for deciding to accept or to reject a single stand-alone project. Sometimes, managers must make decisions regarding which of two projects…

Learning Outcomes By the end of this section, you will be able to: Profitability Index (PI) The profitability index (PI) uses the same inputs as the NPV calculation, but it converts the results to a ratio. The numerator is the present value…

Learning Outcomes By the end of this section, you will be able to: Internal Rate of Return (IRR) Calculation The internal rate of return (IRR) is the discount rate that sets the present value of the cash inflows equal to the present…

Learning Outcomes By the end of this section, you will be able to: Net Present Value (NPV) Calculation Sam’s purchasing of the embroidery machine involves spending money today in the hopes of making more money in the future. Because the…

Learning Outcomes By the end of this section, you will be able to: The payback period method provides a simple calculation that the managers at Sam’s Sporting Goods can use to evaluate whether to invest in the embroidery machine. The payback…

Figure 16.1 Companies make decisions about investments every day. (credit: modification of “Tesla Factory, Fremont (CA, USA)” by Maurizio Pesce/flickr, CC BY 2.0) Chapter Outline 16.1 Payback Period Method 16.2 Net Present Value (NPV) Method 16.3 Internal Rate of Return (IRR) Method 16.4 Alternative Methods 16.5 Choosing…