A combination of payback period, Net Present Value and IRR methods is a suitable way of measuring a project’s appropriateness. By providing a way of picking the most suitable project in consideration of the expected payback time, expected return and cost of capital. (Vinci, 2010) In that respect, the project’s choice is made by considering the three methods evaluation that can be summarized as follows.
Pay back method
The method entails evaluating projects in terms of the number of years that
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(Bodie, Kane & Marcus, 2008) The method discounts the cash flows expected from a project with application of the businesses cost of capital and the projects’ life span. In that respect, projects with positive net present value are deemed suitable while those with negative value are unsuitable. Thus, although both projects are acceptable for having positive NPV values, the large wind-farm project is favorable for having a large NPV value of £45,281 compared to the small wind-farm project’s NPV of £26,383. (Dayananda, 2002)
Internal rate of return evaluation method (IRR) provides a discount rate with which a projects’ net present value equals zero hence equating the projects value with the initial cash outlay. In that respect, a project is suitable if its IRR is greater than the targeted rate of return hence the higher the IRR value the more suitable a project is. Therefore, the method evaluates both projects as suitable for having IRR rates of 26.6% and 24.7% for small and large projects respectively which are higher than the 12% benchmark. However, the small wind-farm project is favorable for having a higher IRR than the large project. (Zaharuddin, 2008)
The ARR evaluation method is usually applied in a project’s evaluation as a means of estimating its rate of return that should be achieved. In that respect, the method uses benchmark return rates which if