The 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.What is the payback period (years) of Project A, B & Ca.4, 5, 6 Yearsb.5.5, 5.4, 2.5 yearsc.5.6, 5.7, 3.5 Yearsd.4.5, 4.9. 2.5 YearsClear my choice
Question
The 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.What is the payback period (years) of Project A, B & Ca.4, 5, 6 Yearsb.5.5, 5.4, 2.5 yearsc.5.6, 5.7, 3.5 Yearsd.4.5, 4.9. 2.5 YearsClear my choice
Solution
To answer this question, we need to calculate the payback period, net present value, internal rate of return, and accounting rate of return for each project.
- Payback Period: This is the time it takes for an investment to generate an amount of income or cash equal to the cost of the investment.
Project A: The initial investment is 5000 and the annual cash inflow is 900. So, the payback period = Initial investment / Annual cash inflow = 5000 / 900 = 5.56 years
Project B: The cash inflow increases every year. The payback period is the year when the cumulative cash inflow equals the initial investment. This happens in year 6.
Project C: The initial investment is 5000 and the annual cash inflow for the first 3 years is 2000. So, the payback period = Initial investment / Annual cash inflow = 5000 / 2000 = 2.5 years
So, the payback periods for projects A, B, and C are approximately 5.56, 6, and 2.5 years respectively.
-
Net Present Value (NPV): This is the difference between the present value of cash inflows and the present value of cash outflows over a period of time.
-
Internal Rate of Return (IRR): This is the discount rate that makes the NPV of all cash flows (both positive and negative) from a particular project equal to zero.
-
Accounting Rate of Return (ARR): This is the average net income an asset is expected to generate divided by its average capital cost, expressed as an annual percentage.
The calculations for NPV, IRR, and ARR are more complex and require specific financial formulas.
Once these values are calculated, the projects can be ranked based on these metrics. The project with the shortest payback period, highest NPV, highest IRR, and highest ARR would be considered the best project.
Based on the payback period calculation, the answer to the question would be option c. 5.6, 6, 2.5 years.
Similar Questions
There are two projects: project A and project B. Each of the project has the cost of Rs 100,000 and cost of capital for each project is 12 percent. The project's expected net cash flows are as follows: Year Project A Project B 0 Rs (100,000) Rs (100,000) 1 65,000 35,000 2 30,000 30,000 3 30,000 30,000 4 10,000 10,000 a. Calculate NPV for each project. Which project or projects should be accepted if they are independent? b. Calculate IRR for each project. Which project should be accepted if they are mutually exclusive?
You are a financial analyst for the Hittle Company. The director of capital budgeting has asked you to analyze two proposed capital investments, Projects X and Y. Each project has a cost of $10,000, and the cost of capital for each project is 12 percent. The projects" expected net cash flows are as follows:Expected Net Cash FlowsYear Project X Project Y0 ($10,000) ($10,000)1 6,500 3,5002 3,000 3,5003 3,000 3,5004 1,000 3,500Calculate each project's payback period, net present value (NPV), internal rate of return (IRR), and modified internal rate of return (MIRR).Which project or projects should be accepted if they are independent?Which project should be accepted if they are mutually exclusive?How might a change in the cost of capital produce a conflict between the NPV and IRR rankings of these two projects? Would this conflict exist if r were 5%? (Hint: Plot the NPV profiles.) Why does the conflict exist?
PaybackConsider two projects: Project A and Project B. Project A requires an initial investment of ₹50 lakh and Project B requires an initial investment of ₹30 lakh. The expected cash flows for the two projects are as below (in ₹):Year 1 2 3 4Cash flow for Project A 10 40 15 15Cash flow for Project B 10 10 15 20Using the payback period method here, which project would you select?Project AProject B
Multiple Choice QuestionA company is considering two projects. Project 1 has an initial investment of $60,000 and expected cash inflows of $20,000 each year for 5 years. Project 2 has an initial investment of $80,000 and expected cash inflows of $20,000 each year for 10 years. Using the payback period as the evaluation method, which investment should be chosen by management?Multiple choice question.Project 2 with total cash inflows of $200,000Project 1 with payback period of 3 yearsProject 2 with payback period of 4 yearsProject 1 with total cash inflows of $100,000
Multiple Choice QuestionA company is considering two capital investments. Each requires an initial investment of $15,000 and has a 4 year useful life. Investment A has expected cash inflows of $5,000 each year for the 4 years for total cash inflows of $20,000. Investment B has the following expected cash flows: Year 1: $8,000; Year 2: $6,000; Year 3: $4,000; Year 4: $2,000; Total cash flows: $20,000. Calculate the payback period for Investment B.Multiple choice question.Cannot be determined from information given.4 years3 years2.25 years
Upgrade your grade with Knowee
Get personalized homework help. Review tough concepts in more detail, or go deeper into your topic by exploring other relevant questions.