HW8_IRR (Internal Rate of Return) and Payback Period_EngEconomics

IRR (Internal Rate of Return) and Payback Period are two common methods used to evaluate the financial viability of a project. IRR is a financial metric used to determine the rate at which the net present value (NPV) of a project equals zero. It represents the discount rate at which the present value of the expected cash inflows equals the present value of the expected cash outflows. A project is considered financially viable if its IRR is greater than the required rate of return. In other words, if the IRR is greater than the minimum acceptable rate of return, the project should be accepted. On the other hand, if the IRR is less than the required rate of return, the project should be rejected. Payback period is another method used to evaluate the financial viability of a project. It represents the amount of time required for a project to generate enough cash inflows to recover the initial investment. The payback period is calculated by dividing the initial investment by the annual cash inflows. A project is considered financially viable if its payback period is shorter than the required payback period. The required payback period is usually set by the company or investor and represents the maximum time period that is acceptable for the investment to pay back the initial investment.