Asela & 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 Asela & Sons’ cost of capital is 12 percent and suggest which of the two projects should be selected.
| Period | Project A | Project B | Project C |
| 0 | (11,000) | (22,000) | (33,000) |
| 1 | 3000 | 6000 | 11000 |
| 2 | 3000 | 6000 | 10000 |
| 3 | 3000 | 6000 | 10000 |
| 4 | 3000 | 6000 | 10000 |
| 5 | 3000 | 6000 | 5000 |
| 6 | 3000 | 6000 | 1000 |
| 7 | – | 6000 | – |
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 0.
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 + 8M
Project B: 3Y + 8M
Project C: 3Y + 3M
ARR
Project A: 21.21%
Project B: 25.97%
Project C: 14.14%
NPV at DCF 12%
Project A: 1336
Project B: 5384
Project C: 1615
IRR
Project A: 16.53%
Project B: 19.48%
Project C: 14.32%
