Question

r 0.185 Year 3 A CF 0 -425000 1 60000 2 100000 135000 4 140000 5 220000 170000 90000 70000 90000 LDN 00 9

Calculate the payback period, internal rate of return, net present value, and profitability index of proposed projects. Select one project after doing the above analysis and justify the selection.

Answer 1

Calculation of  payback period, internal rate of return, net present value, and profitability index of proposed projects.:

Note:

C D E F G H j K L B Cumulative CF Cumulative CF Cumulative CF Year 0 1 2 3 3 CF -425000 60000 100000 135000 140000 220000 170000 90000 70000 90000 4 =C5 =D5+C6 =D6+07 =D74C8 =D8-09 =D9-C10 =D10+C11 =D11+C12 =D12+C13 А B 1 2 A 3 Year 4 0 5 1 6 2 7 8 4 9 5 10 6 11 7 - 12 8 - 13 9 14 15 16 17 18 NPV =NPV(18.5%,C5:C13)+C4 19 NPV 69489.4682 20 21 IRR =IRR(C4:C13) 22 IRR (in %) 22.95 23 24 Profitability Index =NPV(18.5%,C5:C13)/425000 25 Profitability Index 1.16 26 27 Payback Period +3+(425000-295000)/140000 28 =3.92 CF -475000 90000 110000 120000 150000 230000 180000 110000 75000 45000 75000 5 с Year 0 1 2 3 4 5 6 7 8 9 10 11 =G5 =H5+G6 =H6+G7 =H7+G8 =H8+G9 =H9+G10 =H10+G11 =H11+G12 =H12+G13 =H13+G14 CF -590000 85000 120000 --- 150000 www 180000 250000 www 260000 115000 100000 85000 50000 90000 =K5 =L5+K6 =L6+K7 =L74K8 =L8+K9 к =L9+K10 =L10+K11 =L11+12 =L12+K13 =L13+K14 =L14+K15 7 8 9 10 NPV NPV =NPV(18.5%,65:614)+G4 67226.6584 NPV NPV =NPV(18.5%,K5:K15)+K4 51789.6648 IRR IRR (in %) =IRR(G4:14) 22.42 IRR IRR (in %) =IRR(K4:K15) 20.8 Profitability Index =NPV(18.5%,G5:14)/475000 Profitability Index 1.14 Profitability Index =NPV(18.5%,K5:K15)/590000 Profitability Index 1.09 Payback Period Payback Period =4+(475000-470000)/230000 -4.02 =4+(590000-535000)/250000 -4.22

Payback Period can be calculated as :

Pay back Period = Complete years + [(Initial Investment - Cash Flow Recoved ) / Year in which the cash flow is to be recovered]

Net Present Value = Present Value of Cash Inflow - Present Value of Cash Outflow

Profitability Index = Present Value of Cash Inflow / Present Value of Cash Outflow

IRR is the rate at which Present Value of Cash Inflow is equal to Present Value of Cash Outflow

Project A should be selected as it has higher NPV , Higher IRR, Higher Profitability Index and Lowest Payback Period.