Education Technology

Net Present Value and Internal Rate of Return

Published on 06/09/2008

Activity Overview

In this activity, students deal with cash flow and its present value, which is its worth in today's dollars. They will compare alternative investments by determining their Net Present Value and Internal Rate of Return. They will also determine, when called for, whether it is more profitable to lease or borrow money.

Before the Activity

  • See the attached PDF file for detailed instructions for this activity
  • Print page 39 - 41 from the attached PDF file for your class
  • During the Activity

    Distribute the pages to the class.

    Follow the Activity procedures:

  • Calculate the Net Present Value (NPV) of an investment
  • In Accept-Reject decisions, accept those investments having a higher NPV and in comparing mutually exclusive investments, choose the one with the highest NPV
  • Calculate the Internal Rate of Return (IRR) for an investment, determining the rate at which the project's cash flows have a NPV of zero
  • Use the IRR on a lease arrangement to compare with the interest on a loan, and then decide whether to lease or borrow money
  • After the Activity

    Review student results:

  • As a class, discuss questions that appeared to be more challenging
  • Re-teach concepts as necessary