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Financial Business

In: Business and Management

Submitted By christinazhang
Words 610
Pages 3
In the previous requirement, NPV is the factor that determines the rankings. Apart from that, some other factors such as IRR and Payback time may also create a different project ranking.
IRR
IRR, the internal rate of return, is the discount rate at which the present value of expected cash inflows from a project equals the present value of expected cash outflows of the project. Namely, NPV equals zero at this discount rate. By virtue of the NPVs in question one, I used the trial-and-error approach to calculate the approximate IRRs for each project. The result is shown as follows. The IRR of project 1 is between 7% and 8%. For project 2 it is between 10% and 11%. Project 3 gets the lowest IRR which is between 4% and 5%. Since it is the only project whose NPV is a negative number, which means its IRR will be under 7%. “A lower discount rate will increase the NPV”. As for project 4, its IRR is between 8% and 9%. The IRR of project 5 is a little larger than project 4 which is between 9% and 10%. The IRR of the last project is also between 8% and 9%.
I don’t obtain the exact number of these IRRs. However, by estimation, we can still see the ranking order of these projects. IF in descending order, it will be project2, project5, project4 and project6, project 1, project3.
Therefore, besides NPV, IRR is one of the factors that influence the project rankings. Payback time
The second factor that can change the rankings is Payback.”The payback method measures the time the investment will take to recoup, in the form of net cash inflows, the net initial investment in a project.”From the time angle we may have a different ranking. Since the cash inflows are not uniform in our example, the payback computation takes a cumulative form. The process of calculation exhibits in the table attached.
According to the data in the table, it is not difficult for us to rank there...

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