Capital Project Evaluation Worksheet

Questions: Assume PROJECT A requires an initial investment of $500,000 and has future benefits of $50,000, $250,000 and $350,000 in the following years. PROJECT B requires a $250,000 initial investment and has future benefits of $75,000, $75,000 $75,000 and $50,000. A return rate of 10% is required.1. What is the PAYBACK PERIOD for Projects A and B, respectively? Based on payback alone, which project would you recommend and why?2. What is the NPV for Projects A and B (separately)? Based on NPV alone, which project would you recommend and why?3. What is the IRR for Projects A and B (separately)? Based on IRR alone, which project would you recommend and why? Answers: 1. PAYBACK PERIOD PROJECT A 4.3 years PROJECT B 6 years It can be concluded that, Project A has less payback period while Project B has more payback period. Therefore, it can be said Project A is suitable as opting Project A, the initial cash outflow can be recovered quickly than investing in Project B. Therefore, Project A can assure return of money early. 2. NPV = PV of future cash flows minus initial investment Project A Project B PV Year 1 Cash Flow 45,455 68,182 PV Year 2 206,612 61,983 PV Year 3 262,960 56,349 PV Year 4 0 34,151 PV Year 5 0 0 PV Year 6 0 0 PV Year 7 0 0 PV Year 8 0 0 PV Year 9 0 0 PV Year 10 0 0 TOTAL PV of future cash flows 515,026 220,665 Minus initial investment -500,000 -250,000 Net Present Value 15,026 -29,335 From the above valuation of NPV, it can be observed that Project A can be more profitable in comparison to Project B. The Project A can be helpful in generating more income and it can be effective for covering of debts quickly. On the other hand, Project B cannot be taken as it will take away the money and lead to high losses. 3. Internal Rate of Return Project A 11.4% Project B 4.2% The Project A has to be recommended. As per the decision rule of IRR, the project that has higher IRR value, it should be selected. Therefore, at 11.4% IRR, Project As PV of future cash flow can become equal with initial investment of $500000. Thus, more money can be earned than actual cost which is totally different in case of Project B.