Question

QUESTION 4:
Capital Investment Appraisal Techniques
X construction is considering two projects to develop. The estimated net cash flow from each
project is as follows:
Project X Project Y
Year 1 110,000 75,000
Year 2 65,000 150,000
Year 3 100,000 60,000
Year 4 115,000 55,000
Year 5 35,000 60,000
Project requires an investment of $200,000. A rate of 15% has been selected for the NPV
analysis.
Requires to
a) Calculate Payback period, ARR, Net Present Value and Profitability Index
b) Which Project is to be recommended to develop based on NPV, Profitability Index,
Payback period and ARR? Suggest

Answer 1

Ans a.
	a	b	c	d	e
	Project X	Project Y
Year	Cash Flow	Discounted Cash Flow=a*e	Cash Flow	Discounted Cash Flow=c*e	Discount factor =1/1.15^n
0	$        (200,000)	$           (200,000)	$        (200,000)	$       (200,000)	1
1	$          110,000	$               95,700	$            75,000	$           65,250	0.870
2	$            65,000	$               49,140	$          150,000	$         113,400	0.756
3	$          100,000	$               65,800	$            60,000	$           39,480	0.658
4	$          115,000	$               65,780	$            55,000	$           31,460	0.572
5	$            35,000	$               17,395	$            60,000	$           29,820	0.497
Total	$          225,000	$               93,815	$          200,000	$           79,410

	Project X		Project Y
Total Cash Inflow	$          425,000		$          400,000
Cash out flow	$        (200,000)		$        (200,000)
Accounting Profit in 5 Yrs	$          225,000		$          200,000
Average Accounting Profit /Yr=	$            45,000		$            40,000
ARR =Average Profit/Investment=	22.50%		20.00%
NPV =	$            93,815		$            79,410
Payback Period	2.25 Years		2.42 Years
Profitability Index = NPV/Investment	0.47		0.40
Ans b.
Based on higher NPV,ARR and PI and Lower Payback period , Project X is
recommended .