Erandi Perera PLC is evaluating three investment projects, whose expected cash flows are given in following table. Calculate the net present value for each project if Erandi Perera’s cost of capital is 10 percent and suggest which of the two projects should be selected.
| Period | Project A | Project B | Project C |
| 0 | (100,000) | (250,000) | (550,000) |
| 1 | 20000 | 50000 | 100000 |
| 2 | 20000 | 50000 | 100000 |
| 3 | 50000 | 100000 | 100000 |
| 4 | 50000 | 100000 | 200000 |
| 5 | 20000 | 100000 | 100000 |
| 6 | 20000 | 35000 | 100000 |
| 7 | – | – | 100000 |
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%. Scrap Value is 25,000.
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: 3Y + 3M
Project B: 3Y + 6M
Project C: 4Y + 6M
ARR
Project A: 28.00%
Project B: 25.45%
Project C: 13.66%
NPV at DCF 10%
Project A: 30100
Project B: 61990
Project C: 5000
IRR
Project A: 19.47%
Project B: 17.99%
Project C: 10.34%
