Annual average net earnings
A counting rate of Return = ------------------------------------------
Original investment – scrap value
(i) Project I
2,00,000
---------------------
5,56,000 – 56,000
Project II
5,00,000
--------------------------
16,16,000 – 4,31,000
(ii) Net Present Value
Project I
Cash Inflow = 3352 (Present value annuity factor at 15% for 5 years)
Cash Inflow = 2,00,000 x 3,352
= 6,70,400
Cash Outflow = 5,56,000
NPV = 6,70,400 – 5,56,000
= 1,14,400
Project II
Cash Inflow = 5,00,000 x 3,352
= 16,76,000
NPV = 16,76,000 – 16,16,000
= 60,000
Initial Investment
(iii) Pay Back Period = -----------------------------
Annual Cash Inflow
Project I
5,56,000 – 56,000
= ------------------------------
2,00,000
= 2.5 years
Project II
16,16,000 – 4,31,000
= -------------------------------
5,00,000
= 2.37
Internal Rate of Return
Project I =2.532 = 28%
Project II = 2.346 = 30%
Project II is to be selected.
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