Cost Benefit Analysis

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“Cost-Benefit Analysis” (e-Activity part I-IV)

Scenario; support the reasons for recommending and accepting the financial implications of Project A over the superiors choice for Project B.

After reviewing all the information in the e-Activity on the process of capital budgeting it is important to remember the stipulation of the critical acceptance level of 2.75 years and the Internal Rate of Return is set at 12% when making the decision.

Project “A” Project “B”
Payback Period (PP) = 1.89 years
Payback Period (PP) = 3.75 years
Internal Rate of Return (IRR) = 26.72%
Internal Rate of Return (IRR) = 19.74%
Net Present Value (NPV) = $56,922.85
Net Present Value (NPV) = $ 144,409.02

Assuming this is a mutually exclusive project, meaning that only one can be accepted make for a hard sell on accepting Project A. If these were samples of independent projects then both should be accepted because PP is unreliable and NPV is the optimum rule to follow when there is a discrepancy between the three models. In an attempt to convince the superior that Project A is the better choice for the organization I would need to point out that the payback period of less then 2 years falls well below the critical acceptance level of 2.75 years. As a BA, It would also be necessary stress the point that the IRR for project “A” calculates at nearly 27% where Project “B” has a IRR of under 20%.

At his point the superior is looking at the almost double NPV of project “B”. At this stage it is important to have a summary of the financial record ready for examination and an economic forecast that support the finding of an uncertain economic future. In the case of ongoing budget cuts it should be assumed that the future of the organization may incur severe finical distress and may not receive future revenue for other desired…...

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