Navood Ventures PLC is evaluating three investment projects, whose expected cash flows are given in following table. Calculate the net present value for each project if Navood Ventures’ cost of capital is 12 percent and suggest which of the two projects should be selected.
| Period | Project A | Project B | Project C |
| 0 | (100,000) | (100,000) | (100,000) |
| 1 | 30000 | 25000 | 20000 |
| 2 | 30000 | 25000 | 40000 |
| 3 | 30000 | 20000 | 40000 |
| 4 | 30000 | 50000 | 20000 |
| 5 | 30000 | 25000 | 20000 |
| 6 | 30000 | 35000 | 20000 |
| 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%. 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 + 4M
Project B: 3Y + 8M
Project C: 3Y
ARR
Project A: 26.67%
Project B: 26.67%
Project C: 22.86%
NPV at DCF 12%
Project A: 23360
Project B: 20210
Project C: 21460
IRR
Project A: 19.92%
Project B: 18.58%
Project C: 19.18%
