Ashen Investments plc is evaluating three investment projects, whose expected cash flows are given in following table. Calculate the net present value for each project if Ashen Investments’ 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 | (150,000) | (250,000) | (550,000) |
| 1 | 25000 | 48000 | 120000 |
| 2 | 25000 | 39000 | 120000 |
| 3 | 37000 | 52000 | 120000 |
| 4 | 49000 | 64000 | 230000 |
| 5 | 61000 | 66000 | 130000 |
| 6 | 51000 | 63000 | 30000 |
| 7 | 31000 | 61000 | 30000 |
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%. After the third year, discount rate changes to 12%.
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: 4Y + 3M
Project B: 4Y + 9M
Project C: 3Y + 10M
ARR
Project A: 24.57%
Project B: 16.34%
Project C: 11.94%
NPV
Project A: 26782
Project B: 2537
Project C: -2920
IRR
Project A: 16.92%
Project B: 12.22%
Project C: 11.37%
