Shivanthi & Daughters PLC is evaluating three investment projects, whose expected cash flows are given in following table. Calculate the net present value for each project if Shivanthi & Daughters’ cost of capital is 10 percent and suggest which of the two projects should be selected.
| Period | Project A | Project B | Project C |
| 0 | (20,000) | (40,000) | (80,000) |
| 1 | 2500 | 18000 | 20000 |
| 2 | 2500 | 18000 | 20000 |
| 3 | 5000 | 10000 | 20000 |
| 4 | 5000 | 10000 | 10000 |
| 5 | 2500 | 4000 | 15000 |
| 6 | 15000 | – | 20000 |
| 7 | – | – | 8000 |
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%. Scrap Value is 10,000.
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: 5Y + 2M
Project B: 2Y + 5M
Project C: 4Y + 8M
ARR
Project A: 25.00%
Project B: 24.00%
Project C: 13.65%
NPV at DCF 12%
Project A: -13
Project B: 6168
Project C: -3339
IRR
Project A: 11.98%
Project B: 19.63%
Project C: 10.19%
