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 1 year ago

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