Payback Calculation
Year
Machine A $
Machine B $
1
45,000
25,000
Part of 2
20,000 (0.57 of 35,000)
35,000
Part of 3

25,000 (0.45 of 55,000)
Investment
65,000
85,000
1 + 0.57 = 1.57 (Machine A has payback period of 1.57 years) 2 + 0.45 = 2.45 (Machine B has payback period of 2.45 years)
Accounting Rate of Return Calculation
Machine A $
Machine B $
Net Return
155,000
205,000
Total ReturnInvestment
155,000 – 65,000 = 90,000
205,000 – 85,000 = 120,000
Average Return
90,000 / 5 years = 18,000
120,000 / 5 years = 24,000
ARR =
(Average / Investment)
(18,000 / 65,000) x 100 = 28%
(24,000 / 85,000) x 100 = 28%
Net Present Value Calculation
Year
Discount Factor
Machine A $
Machine B $
Machine A has a faster payback period. If Riveau Yachts does not want to take risks such as cash flow problems, it should choose Machine A. Payback period is also more accurate as it is more predictable. However, the net present value calculations shows that Machine B has a higher net present value of returns. Net Present Value is a better method or appraising investments because it takes time value of money into consideration. Thus, choose Machine B.
Assessing financial advantages and disadvantages to investing in each of the machines.
Machine A
Machine A has a faster payback period and therefore, gives Riveau Yachts the advantage of having less risk if they were to have any cash flow problems in the future. Since Riveau Yachts is a business that makes boats, where said technology progresses fast, having a shorter payback period can...
...my home with very little of my own capital investment to lose. Nevertheless, I will use NPV as the primary analytical tool but I will also look that the IRR and Profitability Index for a more informed view of the payback period.
PAYBACK PERIOD RULE IS LIKE A MEAT CLEAVER
I would not want a CSection with a meat cleaver, nor would I want to run my business using just the payback method. The payback period rule...
...of methods that business organisations use can be categorised in one of two ways: traditional and discounted cash flow techniques. Traditional methods include the Average Rate of Return and Payback; discounted cash flow (DCF) methods using Net Present Value and Internal Rate of Return.
NET PRESENT VALUE (NPV)
Net present value is a way of comparing the value of money now with the value of money in the future. A euro today is worth more than a euro in the future,...
...MARCH 2012
C38FN 20122013
CORPORATE FINANCIAL THEORY
WORDCOUNT: 2874
Abstract
This essay will discuss the net present value (NPV), payback period (PBP) and internal rate of return (IRR) approaches for a project evaluation. It is often said that NPV is the best approach investment appraisal, which I why I will compare the strengths and weaknesses of NPV as well as the two others to se if the statement is actually true....
...assess whether it is viable to invest or not the NPV technique can be used to compare the present value of returns and costs. If the NPV is negative it implies that costs exceed returns and hence it would not be advisable to invest in such projects. There are also other investment appraisal techniques that are employed apart from the NPV; these are the pay back method, accounting rate of return and internal rate of return method.
Net present value...
...projects: Payback (PB), Accounting Rate of Return (ARR) and Net Present Value (NPV). We will then apply these techniques to the scenario proposed, Aerospace Ltd, on a specific project which needs consulting.
Contents
Executive Summary  2 
Contents  2 
1.0 Introduction  3 
2.0 Presentation and evaluation of the three techniques used  3 
2.1 Payback Period  3 
2.2 Accounting rate of return  3 
2.3 Net Present Value ...
...How do the results of the NPV technique relate to the goal of maximizing shareholder wealth?
The NPV technique measures the present value of the future cash flows that a project will produce. A positive NPV means that the investment should increase the value of the firm and lead to maximizing shareholder wealth. A positive NPV project provides a return that is more than enough to compensate for the required return on the investment....
...Chapter Five  NPV and Other Investment Rules
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Overview and Learning Objectives
Overview This chapter covers five methods for evaluating capital budgeting problems: 1. The Net Present Value (NPV) method. 2. The Payback Period method...
...chapter is that only the NPV criterion can always provide the correct answer to both questions. For this reason, NPV is one of the two or three most important concepts in finance, and we will refer to it many times in the chapters ahead. When we do, keep two things in mind: (1) NPV is always just the difference between the market value of an asset or project and its cost, and (2) the financial manager acts in the shareholders’ best interests by...
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