A company is considering the following investment projects.
| Projects | Initial Investment ` | Cash Flows ( `) | ||
| A | 10,00,000 | 12,00,000 | 8,00,000 | Nil |
| B | 10,00,000 | 8,00,000 | 10,00,000 | 12,00,000 |
| C | 10,00,000 | 3,00,000 | 5,00,000 | 5,00,000 |
| D | 10,00,000 | 10,00,000 | 6,00,000 | 3,00,000 |
Find out payback period, and net present value and rank the projects according to them. Assume discount rate 10% and 20%.
To calculate the payback period, net present value (NPV), and rank the projects according to them, we'll first calculate the cash flows and then use the given discount rates of 10% and 20%. Here are the calculations for each project:
1. Payback Period:
The payback period is the time it takes for the initial investment to be recovered from the project's cash flows.
For Project A:
Initial Investment = ₹10,00,000
Payback Period = ₹12,00,000 (Year 2) / ₹8,00,000 (Year 3) = 2.5 years (interpolated)
For Project B:
Initial Investment = ₹10,00,000
Payback Period = ₹8,00,000 (Year 2) / ₹10,00,000 (Year 3) = 2.2 years (interpolated)
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