Dr. Paz,
In the self-study review problem, the CFO of Advo Corporation is considering two investment opportunities. Both investments require an initial payment of $400,000 and the desired rate of return is 16 percent. Utilizing the net present value and payback period methods, I will explain which project should be adopted by Advo.
First, the net present value for project 1 and 2 is $34,196 and $58,643 respectively. According to Espinoza and Morris (2013), “to calculate a project NPV, the expected future cash flows are discounted using ‘rate of return’ that would be obtained by an ‘equivalent’ investment alternative available on the capital markets” (p. 471). As a result of the net present value (NPV) calculation, the Advo Corporation should
