Question

Mr Ali has an option of investing in one project from the proposed three different projects. The initial investment and cash flows are given below

r=12%

years	Cf – project 1	Cf – project 2	Cf – project 3
0	(10,000)	(28,000)	(22,000)
1	1000	3000	4000
2	880	7000	1000
3	6000	8000	1000
4	4000	12000	9000
5	2000	7500	11500
6	3650	6400	8900

1. Calculate payback for all three projects   
2. Calculate discounted payback for all three projects
3. Calculate NPV for all three projects   
4. Calculate profitability index for all three projects   
5. Calculate IRR for all three projects   
6. Write a detailed comment on which project Mr Ali must invest on the basis of above calculated criteria’s and why he must ignore the other projects.

Answer 1

		project 1	project2	project 3
a)	payback	3.53	3.83	₹ 4.61
b)	discounted pb	5.24	5.67	6.03
c)	NPV	1242.14	962.08	-147.78
d)	PI	0.12	0.03	-0.01
e)	IRR	16%	13%	12%

f) project 1 should be accepted as it has highest NPV , largest IRR shortest Payback period and discounted payback and good PI

		PROJECT 1
CASH FLOWS		PV FACTOR @12%	PV OF CASH FLOWS
YEAR 0	-10000		-10000
YEAR 1	1000	0.893	892.86
YEAR 2	880	0.797	701.53
YEAR 3	6000	0.712	4270.68
YEAR 4	4000	0.636	2542.07
YEAR 5	2000	0.567	1134.85
YEAR 6	3650	0.507	1849.20
ROR	12.00%	NPV =	1242.14	=NPV(12%.VALUES)
		PI =	0.12	=PV of cash flows /initial investment
		IRR =	16%	=IRR(VALUES,)
		pay back period =	3.53 years	no. of years to earn initial investment
		discounted payback	5.24 years	no. of years to earn initial investment at discount rate

		PROJECT 2
CASH FLOWS		PV FACTOR @12%	PV OF CASH FLOWS
YEAR 0	-28000		-28000
YEAR 1	3000	0.893	2678.57
YEAR 2	7000	0.797	5580.36
YEAR 3	8000	0.712	5694.24
YEAR 4	12000	0.636	7626.22
YEAR 5	7500	0.567	4255.70
YEAR 6	6400	0.507	3242.44
ROR	12.00%	NPV =	962.08	=NPV(12%.VALUES)
		PI =	0.03	=PV of cash flows /initial investment
		IRR =	13%	=IRR(VALUES,)
		pay back period =	3.83 years	no. of years to earn initial investment
		discounted payback	5.67 years	no. of years to earn initial investment at discount rate

		PROJECT 3
CASH FLOWS		PV FACTOR @12%	PV OF CASH FLOWS
YEAR 0	-22000		-22000
YEAR 1	4000	0.893	3571.43
YEAR 2	1000	0.797	797.19
YEAR 3	1000	0.712	711.78
YEAR 4	9000	0.636	5719.66
YEAR 5	11500	0.567	6525.41
YEAR 6	8900	0.507	4509.02
ROR	12.00%	NPV =	-147.78	=NPV(12%.VALUES)
		PI =	-0.01	=PV of cash flows /initial investment
		IRR =	12%	=IRR(VALUES,)
		pay back period =	4.61 years	no. of years to earn initial investment
		discounted payback	6.03 years	no. of years to earn initial investment at discount rate