Question Five Mary decides to finance a car costing €28,000 using a Personal Contract Plan (PCP) with a 5

Amount financed = $ 28,000 - 0.10  $ 28,000 = $ 25,200

The monthly payment is found using the following equation

Mary's monthly payments = $ 756.40

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b)

The payback period is an important tool for investment analysis. The payback period is the number of years it takes to receive back the original investment. For example if a firm has invested in a machinery that will reduce costs,  then the payback period represents the number of years it takes to get back the original investment in the form of savings. It is a very simple but highly useful method and is used frequently in capital budgeting decisions.

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c)

The net present value is a capital budgeting technique that is used to decide if an investment is to be undertaken or not. The NPV technique calculates the present value of cash inflows by discounting the cash inflows of an investment using a suitable discount rate. The present value of cash inflows is subtracted from the initial investment to obtain the net present value of the investment. If the net present value is positive, then the firm undertakes the investment and if NPV is negative, the investment is abandoned.

The internal rate of return (IRR) is the discount rate that makes the present value of cash inflows of a project equal to the initial investment. The IRR is another useful capital budgeting technique to decide if an investment is to be undertaken or not. If the IRR is higher than MARR (Minimum acceptable rate of return), the investment is feasible and if IRR is less than MARR, the investment is not feasible.