Yasas and Sons plc is evaluating three investment projects, whose expected cash flows are given in following table. Calculate the net present value for each project if Yasas and Sons’ cost of capital is 10 percent and suggest which of the two projects should be selected.
| Period | Project A (£000) | Project B (£000) | Project C (£000) |
| 0 | (50,000) | (50,000) | (50,000) |
| 1 | 11000 | 8000 | 20000 |
| 2 | 11000 | 9000 | 20000 |
| 3 | 11000 | 12000 | 20000 |
| 4 | 11000 | 14000 | 1000 |
| 5 | 11000 | 16000 | 1000 |
| 6 | 11000 | 13000 | 1000 |
| 7 | 11000 | 11000 | 1000 |
Calculate the following.
- The payback period using payback method
- Accounting rate of return (ARR)
- Net present value method (NPV)
- Internal rate of return (IRR)
Assume the discount rate is 10%.
Select the best project to invest.
Formulas
Accounting Rate of Return (ARR)
Net Present Value (NPV)
Internal Rate of Return
Answers
Payback Period
Project A: 4 years & 7 months
Project B: 4 years & 6 months
Project C: 2 years & 6 months
Accounting Rate of Return (ARR)
Project A: 15.42%
Project B: 18.85%
Project C: 8.00 %
Net Present Value (NPV)
Project A: £3,537,000
Project B: £6,191,000
Project C: £2,101,000
Internal Rate of Return
Project A: 12.54%
Project B: 13.93%
Project C: 12.47%
Best Project to Invest
Due to higher NPV and IRR, Project B is the best project to invest.
Thank you