NPV =PV of Cash flows -Investment
NPV of A =-60000+36000/(1+12%)+31500/(1+12%)^2+28500/(1+12%)^3
=17540.20
NPV of B =-60000+46000/(1+12%)+30000/(1+12%)^2+15000/(1+12%)^3
=15663.95
NPV of A is more hence Project A must be selected
IRR of A can be calculated using Financial Calculator
CF0=-36000; CF1 =36000; CF2=31500;CG3=28500 CPT IRR
IRR =29.14%
CF0=-60000; CF1 =46000; CF2=30000;CG3=15000 CPT IRR
IRR of B=29.95%
Based on IRR project B should be selected
PI index of A=1+NPV/Investment =1+17540.20/60000 =1.29
PI index of B=1+NPV/Investment =1+15663.95/60000 =1.26
Based on PI index project A must be selected.
Using excel to calculate Payback Period
|
|
CF0 |
CF1 |
CF2 |
CF3 |
| Cash
flow |
-60000 |
36000 |
31500 |
28500 |
|
Cumulative Cash flow |
-60000 |
-24000 |
7500 |
36000 |
| Pay Back
Period |
1.76 |
(1+24000/31500) |
|
|
|
|
|
|
|
|
|
|
|
|
CF0 |
CF1 |
CF2 |
CF3 |
| Cash
flow |
-60000 |
46000 |
30000 |
15000 |
|
Cumulative Cash flow |
-60000 |
-14000 |
16000 |
31000 |
| Pay Back
Period |
1.47 |
(1+14000/30000) |
|
Based on Payback period project B must be selected.
