Running head: PAYBACK METHOD 1Payback MethodMemo to Management Internal rate of return (IRR) is used to measure the profitability of future or possible investments. The IRR helps to further evaluate a project and whether to accept it or not. To find the IRR, one must calculate using net present value (NPV) by solving for R if the net present value is equal to zero.
PAYBACK METHOD2Net present value (NVP) is the difference of the value of money currently and the future value of that money in an investment over a period of time. The NPV calculation isused primarily to analyze profitability of an investment. The payback method is a given length of time to recover the money from an investment. The payback method does not incorporate the time value of money. It is a simple equation to figure out how long it takes to break even from an investment. Advantages and DisadvantagesOne of the advantages of using the IRR method is that is shows the return on the original investment. The disadvantage to using the IRR is that it may give a conflicting