Determining a Project's Payback Period

Determining a project's payback period, profitability index, net present value, and internal rate of return would help in making a decision regarding the acceptance of that project. Simply stated, when NPV is greater or equal to zero, then the project is accepted. Also, if IRR is greater or equal to k, or cost of capital, the project is accepted. The simplicity in the NPV or IRR is helpful when making a decision.

ranking obtained by simple inspection of the cash flows?

The ranking is more precise when using quantitative methods. For example, Project 3 has the highest NPV, highest PI, and second highest IRR, but has the longest payback period.

1. Can you rank the projects simply by inspecting the cash flows?

No, it is difficult to determine the effectiveness of a project by simply looking at the cash flows. The various cash flows have different payback periods and at the same time different amounts of benefits, so it is