Question

You are the project manager for the Late Night Smooth Jazz Club chain, with stores in 12 states. Smooth Jazz is considering opening a new club in Kansas City or Spokane. You have derived the following information: Project Kansas City: The payback period is 27 months, and the IRR is 6 percent. Project Spokane: The payback period is 25 months, and the IRR is 5 percent. Which project should you recommend to the selection committee?

Answer 1

Project Kansas City

Explanation:

Payback period: It reflects the period at which the investor recovered their invested money. It always shows in years.

IRR: It refers to the internal rate of return. It shows an interest rate at which the Net present value is zero or the initial investment and the present value of all years cash flow would be equal

In the question, it is mentioned that Project Kansas city has a payback period of 27 months and IRR is 6% whereas the project Spokane has a payback period of 25 months and IRR is 5%.

So if we compare both the projects based on IRR, the project Kansas city has higher IRR which means it produces a higher return in the near future.