Each cash flow will be discounted by multiplying it by the result of the formula 1 / (1 + Interest Rate)Time
The Internal Rate of Return (IRR) is the discount rate that makes the NPV Equal to 0. Thus 15% is the highest discount rate that would make the project acceptable. Since the project has a positive Net Present Value at the assigned discount rate, it should be accepted.
2500/50 = 50 months or 4 years 2 months
Since the payback period is less than five years, the project will be accepted.
NPV is positive, project is accepted.
NPV is negative, project is rejected.
As the discount rate increases, the firm should be more likely to reject the project. If payback analysis is the only criteria, however, the discount rate is irrelevant to the firms decision.
Projects A and B are series 1 and 2, respectively. Project A is preferable at discount rates greater than 4%.
= Investment + NPV of Future Cash flows/Investment
If you could undertake only one project, then project A has a higher profitability
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