Question

A company estimates the following net cash inflows and outflows for a capital investment

project that is currently under consideration.

year Cash flow

0 (575,000)

1 45,800

2 99,000

3 104,300

4 118,700

5 130,400

6 129,000

7 116,500

8 77,200

9 55,000

10 12,500

Calculate the ARR and NPV of the project.

Answer 1

Ans.

ARR= Average profit/ Average investment *100

Average profit- (45,800+99,000+104,300+118,700+130,400+129,000+116,500+77,200+55.000+12,500)= 888,400

888,400/10= 88,840

Average investment = 575,000

ARR= 88,840/575,000*100= 15.45 or 15%

NPV=

Year	Annual cash inflow	Cumulative cash inflow
1	45,800	45,800
2	99,000	144,800
3	104,300	249,100
4	118,700	367,800
5	130,400	498,200
6	129,000	627,200
7	116,500	743,700
8	77,000	820,700
9	55,000	875,700
10	12,500	888,200

It is clear from cumulative frequency that initial investment of 575,000 will be recovered between year 5 and 6

Payback period will be fraction more than 5 years, the sum 498,200 will be recovered by end of 5th year balance 76,800 is needed to be recovered from in 6th year in 6th yeae cash inflow is 129,000,

therefore pay back period = 76,800 /129,000= .595 or 60 days or 2 months

therefore pay back period will be= 5.2 years or 5 years 59 days .