Case StudyThe expected cash flows of three projects are given below. The cost of capital is 10 per cent. (Amount in INR.)Period Project A Project B Project C 0 ( 5000) ( 5000) ( 5000)1 900 700 2,0002 900 800 2,0003 900 900 2,0004 900 1000 1,0005 900 1100 6 900 1200 7 900 1300 8 900 1400 9 900 1500 10 900 1600 * CALCULATE the payback period, net present value, internal rate of return and accounting rate of return of each project.*IDENTIFY the rankings of the projects by each of the four methods. Based on the calculations, choose the correct answers of the below mentioned questions.
Question
Case StudyThe expected cash flows of three projects are given below. The cost of capital is 10 per cent. (Amount in INR.)Period Project A Project B Project C 0 ( 5000) ( 5000) ( 5000)1 900 700 2,0002 900 800 2,0003 900 900 2,0004 900 1000 1,0005 900 1100 6 900 1200 7 900 1300 8 900 1400 9 900 1500 10 900 1600 * CALCULATE the payback period, net present value, internal rate of return and accounting rate of return of each project.*IDENTIFY the rankings of the projects by each of the four methods. Based on the calculations, choose the correct answers of the below mentioned questions.
Solution
To calculate the payback period, we need to determine the time it takes for each project to recover its initial investment.
For Project A, the initial investment is INR 5000. By looking at the cash flows, we can see that the investment is recovered in the third year when the cash flow is INR 2000. Therefore, the payback period for Project A is 3 years.
For Project B, the payback period is also 3 years as the investment is recovered in the third year when the cash flow is INR 2000.
For Project C, the payback period is 2 years as the investment is recovered in the second year when the cash flow is INR 2000.
To calculate the net present value (NPV), we need to discount the cash flows using the cost of capital of 10%. The formula for NPV is:
NPV = CF1 / (1+r)^1 + CF2 / (1+r)^2 + ... + CFn / (1+r)^n - Initial Investment
Using this formula, we can calculate the NPV for each project.
For Project A, the NPV is calculated as follows: NPV = 900 / (1+0.1)^1 + 900 / (1+0.1)^2 + ... + 900 / (1+0.1)^10 - 5000
For Project B, the NPV is calculated in the same way.
For Project C, the NPV is calculated in the same way.
To calculate the internal rate of return (IRR), we need to find the discount rate that makes the NPV equal to zero. We can use trial and error or financial software to find the IRR for each project.
To calculate the accounting rate of return (ARR), we need to divide the average annual profit by the initial investment and multiply by 100. The formula for ARR is:
ARR = (Average Annual Profit / Initial Investment) * 100
Using this formula, we can calculate the ARR for each project.
Based on the calculations of payback period, NPV, IRR, and ARR, we can rank the projects. The project with the shortest payback period is ranked first, while the project with the highest NPV, IRR, or ARR is also ranked first.
Please provide the specific calculations for each project to determine the rankings and answer the questions.
Similar Questions
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