Answer:
Calculation of Net Present Value of both projects:
Project A |
|
Particulars |
Amount |
Projected Cash inflows(a) |
51,745 |
Discounting Factor(b) |
6% |
No of years(c) |
3 |
PV Annuity Factor(d) |
2.6730 |
PV of Cash Inflows {e=(a*d)} |
138,314.39 |
Cash Outflow (f) |
109,000 |
NPV (e-f) |
29,314.39 |
Project B |
|
Particulars |
Amount |
Projected Cash inflows(a) |
17,229 |
Discounting Factor(b) |
6% |
No of years(c) |
3 |
PV Annuity Factor(d) |
2.6730 |
PV of Cash Inflows {e=(a*d)} |
46,053.12 |
Cash Outflow (f) |
40,000 |
NPV (e-f) |
6,053.12 |
Conclusion: Since NPV in Project A is higher Project A should be chosen.
2.)
IRR | ||
Project A | Project B | |
Cash inflows | 51,745 | 17,229 |
Annuity PVF at 20% for 3 years | 2.1065 | |
Annuity PVf at 14% fr 3 yrs | 2.3216 | |
Present value of inflows | 109,000.84 | 39,998.85 |
Less: Investment | 109,000 | 40,000 |
NPV | -0.84 | -1.15 |
IRR | 20% | 14% |
Conclusion: Based on IRR, Project A should be chosen because it has higher IRR.
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