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Running head: PAYBACK METHOD, IRR, AND NPV1Payback Method, Internal Rate of Return (IRR), and Net Present Value (NPV)David MercadoFIN/571Sep 3, 2018Professor Arnold Harvey
PAYBACK METHOD, IRR, AND NPV23 Sep 2018MEMORANDUM FOR MANAGEMENTFROM: DAVID MERCADOSUBJECT: Investment Rules1. This memorandum (memo) is to inform management about of the different investment rules the firm can use to evaluate projects. The three methods that will be presented in this memo are IRR, NPV, and payback. This memo will evaluate project cash flows and the advantages and disadvantages of each method. 2. The IRR is by name is an internal analysis of cash flows. The firm would use the NPV formula and plug in the project’s cash outflow and inflow, and use zero as the NPV (Jaffe, et al., 2016, p. 142). The only remaining item would be the rate, so the firm would solve for the rate. This becomes the rule for IRR. If the IRR is higher than the discount rate the project is accepted and if the IRR is less than the discount rate it is rejected (Jaffe, et al., 2016, p. 142).