Question

What decision criteria should managers use in selecting projects when there is not enough money to invest in all available positive-NPV products? Provide an example

Answer 1

Ans. Selection criteria for the project where there is not enough money to invest in all availabe positive NPV

1. Payback period: payback period is the ratio of total cashflow to the average per period cash. It is the time when we will recover our invested amount. pay back period is basic project selection method.

example: Investment amount is: 100000 in project A or B

Return per annum in project A is 10000 and Project B is 20000

Payback period for A : 10yrs

Payback period for B : 5yrs

Decision: Project B is better than project because it will recover project cost shorter time as compair of project A.

2. Profitability Index (PI): It represent Net Present value of cashflow for a project divided by net present value of cash outflow. whose PI is more we will select that project

Lets take the example: Investment amt is 100000 ,

PV of cashinflow of project A 125000

PV of cashinflow of project B 100000

PI for A = 125000/100000 = 1.25

PI for B = 100000/100000 = 1

project A is better than project ...