MA43 - Net Present Value, Payback Period, and IRR Sample 2025

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To calculate the payback period, you need to divide the projects initial investment by its annual or monthly cash inflow. The payback period is useful for assessing the liquidity and risk of a project, as it shows how quickly you can recoup your money.
Payback period is time within which investor expects to recover his/ her investment. Whereas, internal rate of return is the minimum return entity expect to gain on spending. IRR usually reciprocates cost of capital as an entity at-least expects to cover its cost of capital from any investment it intends to make.
The alternative formulas, most often taught in academia, involve solving for the IRR for the equation to hold true (and require using a financial calculator). Or, an alternative method to solve for IRR is the following: 0 = NPV CF n (1 + IRR)^ n.
To calculate the payback period you can use the mathematical formula: Payback Period = Initial investment / Cash flow per year For example, you have invested Rs 1,00,000 with an annual payback of Rs 20,000. Payback Period = 1,00,000/20,000 = 5 years. You may calculate the payback period for uneven cash flows.
Heres what you do: Divide the initial investment by how much cash you expect the investment to bring in each year.
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In other words, if you are provided an IRR of 20% and asked to determine the proceeds achieved in year 5, the result is simple: Your investment will grow by 20% for 5 years. This works out to 2.49.
Because of its ability to personalize the assessment, NPV offers a more accurate and relevant measure for comparing investment opportunities within capital budgeting decisions. IRR is most helpful when comparing projects or investments or when finding the best discount rate proves elusive.

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