Introduction:
Payback Period: Payback period is the period in which the project recovers its initial cost of the investment. It can be calculated by dividing the initial investment by the annual
Hence, smaller the payback period better it is. A project with the smaller payback period is chosen first in the capital rationing process.
ARR: Accounting
The formula to calculate ARR is as follows:
Hence, higher the ARR better it is. A project with the Higher ARR is chosen first in the capital rationing process.
NPV:
A project should be accepted if it has a positive NPV. Hence, higher the NPV better it is. A project with the Higher NPV is chosen first in the capital rationing process.
Profitability Index: Profitability Index is similar to the NPV method to evaluate a project. It calculates the ratio between the present value cash inflow and present value of
A project should be accepted if it has a PI more than or equal to 1. Hence, higher the NPV better it is. A project with the Higher NPV is chosen first in the capital rationing process.
IRR:
Requirement-a:
To Calculate: The payback, ARR, the NPV, and the profitability index of the two plans
Requirement -b:
To determine: The estimated IRR of the plan A
Requirement -c:
To determine: The verification of NPV and IRR using the excel function and comparison of IRR and required rate of return for both plans
Requirement -d:
To determine: The recommendation to choose a plan
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Chapter 26 Solutions
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