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Your firm is considering two projects with the following cash flows: Cash flows from project B (£000) (500) 200 250 170 25 30 Year Cash flows from project A (£000) 0(500) 167 180 160 100 100 4 1. Calculate the ARR and payback rule 2. If the appropriate discount rate is 12%, rank the two projects 3. Which project is preferred if you rank by IRR? 4. Calculate the discount rate (r) for which the NPVs of both projects are equal 5. Should you use NPV or IRR to choose between the two projects? Explain your choice Discuss the advantages and disadvantages of NPV, IRR, ARR and payback rule. Which method(s) would you prefer as analysts and under which circumstances?

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IRR ARR Project B NPV Year Project A Dis Factor @ 12% Project A Project B Project A Projedt A Cash Flow Cash Flow 500 167 180 160 100 100 15.4% 500 1.000(500)1000 0.867 0.751 0.651 0.564 0.489 144% 500 173 188 0 500 0.893 0.797 0.712 0.636 0.567 149 143 114 0874 199 0.764 0.668 16 0.584 171 0.510 146 138 107 179 250 170 25 30 121 14 15 57 51 207 414 28% 175 NPV 27 32 NPV Average annual return 135 ARR ARR Average Annual retum / Initial Investment Payback Period 3 Years 2 years+ 12/170 (500-450) months 2 Years 3.5 Months 2 NPV considering descount rate @12% Rank 1- Project B Rank 2-Project A 3 IRR is the discounting rate at which inflow is equals to Outflows Rank as per IRR (Lesser IRR Project has rank 1) Rank 1- Project A Rank 2-Project B 4 Rate at which NPV for both projects are same 9.7%| PV Facto Project 1ojct 2 1.000 0.912 0.831 0.757 0.691 0.629 500 152 150 121 69 63 500 182 208 129 19 NPV

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