Ravi Co Ltd. is considering the following investment projects:
Cash flows (Rs.)
Projects Year0 Year1 Year2 Year3
A -10,000 +10,000 - -
B -10,000 +7,500 +7,500 -
C -10,000 +2,000 +4,000 +12,000
D -10,000 +10,000 +3,000 +3,000
a) Rank the projects according to each of the following methods :
(i) Pay back (ii) ARR (iii) IRR and
(iv) NPV- assuming discount rates of 10% and 30%
b) Assuming that the projects are independent, which one should be accepted?
If the projects are mutually exclusive, which project is the best?
Answer 4 A
Pay Back Period
Year Project A Project B Project C Project D Project A Project B Project C Project D
0 -10000 -10000 -10000 -10000 -10000 -10000 -10000 -10000
1 10000 7500 2000 10000 0 -2500 -8000 0
2 0 7500 4000 3000 0 5000 -4000 3000
3 0 0 12000 3000 0 5000 8000 6000
Total 0 5000 8000 6000 -10000 -2500 -14000 -1000
Rank 3 2 4 1
IV) NPV
Year Project A Project B Project C Project D Discount rate 10% Project A project B Project C Project D
0 -10000 -10000 -10000 -10000 0.909 -9090 -9090 -9090 -9090
1 10000 7500 2000 10000 0.826 8260 6195 1652 8260
2 0 7500 4000 3000 0.751 0 5632.5 3004 2253
3 0 0 12000 3000 0.683 0 0 8196 2049
Total 0 5000 8000 6000 NPV -830 2737.5 3762 3472
Rank 4 3 1 2
Year Project A Project B Project C Project D Discount Rate 30% project A Project B Project C Project D
0 -10000 -10000 -10000 -10000 0.769 -7690 -7690 -7690 -7690
1 10000 7500 2000 10000 0.592 5920 4440 1184 5920
2 0 7500 4000 3000 0.455 0 3412.5 1820 1365
3 0 0 12000 3000 0.35 0 0 4200 1050
Total 0 5000 8000 6000 NPV -1770 162.5 -486 645
Rank 4 2 3 1
According to NPV project C is the best project
According to Pay Back Project D is the Best Project
According To IIR project B is the Best Project
According to AAR project A is the Best Project
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