Question

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

	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

Answer 1

a) Payback period

✓ Project X = 2 year 3 months

✓ Project Y = 1 year 10 months

b) ARR

✓ Project X = 42.5%

✓ Project Y = 40%

c) Net Present Value

✓ Project X = 93815

✓ Project Y = 79410

d) Profitability Index

✓ Project X = 1.47

✓ Project Y = 1.40

B) On the basis of NPV, Profitability Index and ARR project X must be developed. While on the basis of Payback period method Project Y must be developed.

Calculation is given in the below attached images

PLEASE GIVE UPVOTE

Thank you in advance