Question

Question #1

Consider the following potential investment, which has the same risk as a firm’s other projects:

Time	Cash Flow
0	($400,000)
1	$100,000
2	$108,000
3	$115,000
4	$135,000
5	$145,000

d. Which of the decision rules (payback, NPV, or IRR) do you think is the best rule for a firm to use when evaluating projects? Be sure to justify your choice.

Answer 1

Answer

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NOTE-

As question has not given any WACC so in this question we are assuming that WACC is 10% . as given question is incomplete so we are assuming WACC i.e cost of capital as 10%

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first we are going to find the payback period

so best way to evaluate the project is NPV because it gives the perfect picture of cash flow which is going to arise in future.

NPV is the best way to evaluate the project.