. Rank the following investment proposal in order of their profitability according to (a) Payback method (b) Rate of return method (c) Present value of index method. Cost of capital 10%
Project initial outlay annual cash flow Life in years
A 25000 3000 10
B 3000 1000 5
C 12000 2000 8
D 20000 4000 10
E 40000 8000 12
Project initial outlay annual cash flow Payback period Rank
A 25000 3000 8.33 4
B 3000 1000 3 1
C 12000 2000 6 3
D 20000 4000 5 2
E 40000 8000 5 2
(b) ARR method
Project initial outlay annual cash flow / Av.Invst ARR(%) Rank
Average earnings
A 25000 3000 12500 24 4
B 3000 1000 1500 66.67 1
C 12000 2000 6000 33.33 3
D 20000 4000 10000 40 2
E 40000 8000 20000 40 2
© profitability index method
Project Initial outlay Annual discount factor PVof NPV Rank cash inflow At 10% cash flow index
A 25000 3000 6.1426 18427.8 0.737 rej
B 3000 1000 3.79 3790 1.26 2
C 12000 2000 5.848 11696 0.97 rej
D 20000 4000 6.1426 24570.4 1.22 3
E 40000 8000 6.8116 54492.8 1.36 1
