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In: Economics

A pharmaceutical company developed four investment plans. The initial investment and the corresponding annual cash flows...

A pharmaceutical company developed four investment plans. The initial investment and the corresponding annual cash flows of the four investment plans for consecutive 5 years are shown in the following Table Q1.

Project Name I II III IV
Initial Investment (OMR) 58000 68000 97000 119000
Annual Cash inflow (OMR) 16000 23000 29000 35000

Identify the best project and decide the ranking based on the following profitability methods.

a) Average rate of return.

b) Payback period.

c) Net Present value with discounting rate at 8%

d) Benefit to cost ratio with discounting rate at 11%

e) Internal rate of return for range of suitable discounting rate

Solutions

Expert Solution

Here,

I II III IV
Initial Investment 58000 68000 97000 119000
Annual Cash Inflow 16000 23000 29000 35000

Average Rate of Return calculation, using XIRR function in excel

I II III IV
28-05-2020 Year 0 -58000 -68000 -97000 -119000
28-05-2021 Year 1 16000 23000 29000 35000
28-05-2022 Year 2 16000 23000 29000 35000
28-05-2023 Year 3 16000 23000 29000 35000
28-05-2024 Year 4 16000 23000 29000 35000
28-05-2025 Year 5 16000 23000 29000 35000
Rate of Return 11.77% 20.52% 15.09% 14.40%

Ranking, II>III>IV>I

Payback period = Initial investment / yearly benefits

I II III IV
Initial Investment 58000 68000 97000 119000
Annual Cash Inflow 16000 23000 29000 35000
Payback period 3.625 2.956522 3.344828 3.4

Ranking II>III>IV>I

Present Value using XNPV Function

Discounting Rate 8%
I II III IV
28-05-2020 Year 0 -58000 -68000 -97000 -119000
28-05-2021 Year 1 16000 23000 29000 35000
28-05-2022 Year 2 16000 23000 29000 35000
28-05-2023 Year 3 16000 23000 29000 35000
28-05-2024 Year 4 16000 23000 29000 35000
28-05-2025 Year 5 16000 23000 29000 35000
Net Present Value 5878.59 23825.47 18779.94 20734.41

Ranking II>IV>III>I

Benefit to Cost Ratio

Discounting Rate 11%
I II III IV
28-05-2020 Year 0 0 0 0 0
28-05-2021 Year 1 16000 23000 29000 35000
28-05-2022 Year 2 16000 23000 29000 35000
28-05-2023 Year 3 16000 23000 29000 35000
28-05-2024 Year 4 16000 23000 29000 35000
28-05-2025 Year 5 16000 23000 29000 35000
Present Value of Cost 58000.00 68000.00 97000.00 119000.00
Present value of Return 59128.6248 84997.4 107170.6 129343.87
Benefit to Cost 1.019 1.250 1.105 1.087

Ranking II>III>IV>I

Rahul Sunny answered 2 years ago
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