Manjula Associates PLC is evaluating three investment projects, whose expected cash flows are given in following table. Calculate the net present value for each project if Manjula Associates’ cost of capital is 10 percent and suggest which of the two projects should be selected.
| Period | Project A | Project B | Project C |
| 0 | (75,000) | (80,000) | (200,000) |
| 1 | 20000 | 25000 | 80000 |
| 2 | 20000 | 25000 | 80000 |
| 3 | 20000 | 25000 | 80000 |
| 4 | 20000 | 15000 | 40000 |
| 5 | 20000 | 15000 | 20000 |
| 6 | 20000 | 15000 | – |
| 7 | 20000 | – | – |
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 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: 3Y + 9M
Project B: 3Y + 4M
Project C: 2Y + 6M
ARR
Project A: 25.21%
Project B: 18.52%
Project C: 20.95%
NPV at DCF 12%
Project A: 16280
Project B: 5700
Project C: 28940
IRR
Project A: 18.78%
Project B: 15.09%
Project C: 18.99%
