Essay about The Dilemma at Day-Pro
Tim can show that the payback period is not appropriate in the analysis of the projects for the following reasons. First, it does not properly account for the time value of money, risk financing and other important considerations such as opportunity cost and it does not consider the cost of capital. It does not specify any required comparison to other investments or even to not making an investment. The method is an indication of both the risk and the liquidity without considering the terms to maturity. Second, it ignores cash flows occurring after the payback period. An implicit assumption in the use of method is that returns to the investment continue after the payback period. Cash flows occurring …show more content…
7. Profitability Index of each proposal Synthetic Resin = 1.9 Epoxy Resin = 1.7 • The decision criterion is to accept the project if the PI is greater than or equal to 1.00. Since both projects are greater than 1 then the project with higher PI will be accepted, which is the Synthetic Resin.
Yes, this measure can help solve the dilemma. Although the NPV measures the absolute desirability of a project, the profitability index provides a relative measure of an investment proposal’s desirability. It yields the same accept and/or reject decision as the NPV method. Because the NPV and PI criteria are essentially the same, they both employ free cash flows, recognize the timing of the cash flows and are consistent with the goal of maximizing shareholder’s wealth.
8. Synthetic Resin Team has been more conservative in its revenue projection
Since we started our analysis by computing the Payback Periods, IRRs, NPVs and PIs of both projects, we can say that the right project to choose is the Synthetic Resin because it is the project who gives higher return. If in the documentation the Synthetic