Arun Engineering Co. is considering two investments. Each requires an

Question

Arun Engineering Co. is considering two investments. Each requires an initial investment of Rs 1,80,000. The cost of capital is 8%. The total cash inflow after tax and depreciation for each project is as follows:

Year Project A (Rs.) Project B (Rs.)

1 30,000 60,000
2 50,000 1,00,000
3 60,000 65,000
4 65,000 45,000
5 40,000 --
6 30,000 --
7 16,000 --

Calculate the Payback Period, Profitability Index and Net Present Value of both the projects.

27 Apr 2023

Answer :

Word Count : 883

To calculate the payback period, profitability index, and net present value (NPV) for both projects, we need to consider the cash flows and the cost of capital. Let's calculate them step by step.

Step 1: Calculate the annual cash flows for each project.

Year Project A (Rs.) Project B (Rs.)
1 30,000 60,000
2 50,000 1,00,000
3 60,000 65,000
4 65,000 45,000
5 40,000 --
6 30,000 --
7 16,000 --

Step 2: Calculate the cumulative cash flows for each project.

Year Project A (Rs.) Project B (Rs.)
1 30,000 60,000
2 80,000 1,60,000
3 1,40,000 2,25,000
4 2,05,000 2,70,000
5 2,45,000 2,70,000
6 2,75,000 2,70,000
7 2,91,000 2,70,000

Step 3: Calculate the payback period for each project.

The payback period is the time taken to recover the initial investment. We need to find the year when the cumulative cash flow is equal to or greater than the initial investment of Rs 1,80,000.

For Project A:
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