r= 11%

Project NO Investment Required Cash Inflows

0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
1 -40,000 12,000 5,000 6,000 10,000 14,000 6,000
2 -40,000 15,000 15,000 15,000 10,000 8,000 -
a) Calculate payback period of both projects.
b) Calculate IRR of both projects.
c) Calculate NPV of both projects.
d) Comment on the results in above requirement.

a) Payback Year Proj 1 cash flowCumulative CF Year Proj 2 Cash FlowCumulative CF

0 -40,000 -40,000 0 -40,000 -40,000
1 12,000 -28,000 1 15,000 -25,000
2 5,000 -23,000 2 15,000 -10,000
3 6,000 -17,000 3 15,000 5,000
4 10,000 -7,000 4 10,000 15,000
5 14,000 7,000 5 8,000 23,000
6 6,000 13,000 6 -
Payback Period = 4yrs + (7000/14000) =2 yrs + (10000/15000)
= 4.5 yrs = 2.67 yrs
b)
IRR Project 1 8.67%
IRR Project 2 19.54%

Rate 11% 7% Machine

Prjoect 1 0 1 2 3 4 5 6 NPV
-40,000 12,000 5,000 6,000 10,000 14,000 6,000
Discount factor 11% 1 0.901 0.812 0.731 0.659 0.593 0.535
DCF (40,000.00) 10,810.81 4,058.11 4,387.15 6,587.31 8,308.32 3,207.85
NPV (2,640.46) ###

Prjoect 1 0 1 2 3 4 5 6 Machine
 -40,000 12,000 5,000 6,000 10,000 14,000 6,000 NPV
Discount factor 7% 1 0.935 0.873 0.816 0.763 0.713 0.666
DCF (40,000.00) 11,214.95 4,367.19 4,897.79 7,628.95 9,981.81 3,998.05
NPV 2,088.75 ###
 Rate 11% 20% Machine
Prjoect 2 0 1 2 3 4 5 NPV
-40,000 15,000 15,000 ### 10,000 8,000
Discount factor 11% 1 0.901 0.812 0.731 0.659 0.593
DCF (40,000.00) 13,513.51 12,174.34 10,967.87 6,587.31 4,747.61
NPV 7,990.64 $7,198.78

Try 20% 0 1 2 3 4 5 Machine

-40,000 15,000 15,000 ### 10,000 8,000 NPV
Discount factor 20% 1 0.833 0.694 0.579 0.482 0.402
DCF (40,000.00) 12,500.00 10,416.67 8,680.56 4,822.53 3,215.02
NPV (365.23) ($304.36)

c) NPV
Rate 11% Machine
Prjoect 1 0 1 2 3 4 5 6 NPV
-40,000 12,000 5,000 6,000 10,000 14,000 6,000
Discount factor 11% 1 0.901 0.812 0.731 0.659 0.593 0.535
DCF (40,000.00) 10,810.81 4,058.11 4,387.15 6,587.31 8,308.32 3,207.85
NPV (2,640.46) ###

Prjoect 2 0 1 2 3 4 5 Machine
-40,000 15,000 15,000 ### 10,000 8,000 NPV
Discount factor 11% 1 0.901 0.812 0.731 0.659 0.593
DCF (40,000.00) 13,513.51 12,174.34 10,967.87 6,587.31 4,747.61
NPV 7,990.64 7,198.78

d)
Proje 1 Proj 2
Payback period 4.5 yrs 2.67 yrs
IRR 8.67% 19.54%
NPV (2,640.46) 7,990.64

Athough life span of two projects are different, they need exactly similar outlay of investment initially. Based on our calculations
of different project appraisal method we can conclude that Project 2 is only acceptable or feasible investment. Though payback
period method ignore cashflows after the payback period however IRR and NPV method confirms that Project 2 will provide
higher return as well as increased value to the company.
Athough life span of two projects are different, they need exactly similar outlay of investment initially. Based on our calculations
of different project appraisal method we can conclude that Project 2 is only acceptable or feasible investment. Though payback
period method ignore cashflows after the payback period however IRR and NPV method confirms that Project 2 will provide
higher return as well as increased value to the company.
our calculations
hough payback
will provide
our calculations
hough payback
will provide
 Meer
Rate 20%
Prjoect 1 0 1 2 3 4 5 6 7
Cash Flow -110,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000
Terminal value
Working Capital -8,000
Net cash flow -118,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000

Discount factor 11% 1 0.833 0.694 0.579 0.482 0.402 0.335 0.279
Present Values (118,000.00) 20,833.33 17,361.11 14,467.59 12,056.33 10,046.94 8,372.45 6,977.04
1.a NPV (13,233.42)

1.b IRR 16.51%

2 Accrual accounting rate of return

Net Initial investment 110,000 + 8000 =118,000

Annual Depreciation (110,000 - 30,000)/8 y = 10,000

25000 - 10000
Accrual accounting rate of return
118,000 = 12.71%

3 If your decision is based on the DCF model, the purchase would be made because the net present value is positive, and the
16.51% internal rate of return exceeds the 14% required rate of return. However, you may believe that your performance may
actually be measured using accrual accounting. This approach would show a 12.71% return on the initial investment, which is
below the required rate. Your reluctance to make a buy decision would be quite natural unless you are assured of reasonable
consistency between the decision model and the performance evaluation method.
 Machine
8 NPV
25,000
30,000
8,000
63,000

0.233
14,651.79
###

tive, and the

erformance may
tment, which is
ed of reasonable