Situations like this influence firms decision to use payback

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Reference no: EM13809150

A firm has a $100 million capital budge. It is considering two projects that each cost $100 million. Project A has an IRR of 20 percent, and NPV of $9 million, and will be terminated after 1 year at a profit of $20 million, resulting in an immediate increase in EPS. Project B, which cannot be postponed, has an IRR of 30 percent and an NPV of $50 million. However, the firm’s short-run EPS will be reduced if it accepts Project B, because no revenues will be generated for several years.

a. Should the short-run effects on EPS influence the choice between the two projects?

b. How might situations like this influence a firm’s decision to use payback?

Reference no: EM13809150

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