Analysis of Investment Projects: NPV, IRR, and Project Recommendation

This assignment analyzes two investment projects using Net Present Value (NPV) and Internal Rate of Return (IRR) techniques. The solution calculates the depreciation for each machine (A, B, and X), determines the cash inflows for each project over a six-year period (2016-2021), and then computes the NPV and IRR for each project. Project A yields a higher NPV and IRR, suggesting it's the more favorable investment. The assignment also briefly discusses various investment appraisal techniques, including their limitations, such as accurately estimating future cash flows and the potential for contradictory results between different techniques. The analysis concludes that Project A should be selected based on the financial metrics. This document is designed to help students understand investment appraisal and project selection.

(a)
Calculation of Depreciation
Machine A = 125000
3
= 41667
Machine X = 60000
5
= 12000
Machine B = 125000
6
= 20833
Calculation of Cash Inflow of Project A
2016 2017 2018 2019 2020 2021
Net Profit 60000 60000 60000 50000 50000 40000
Add:
Depreciation 41667 41667 41666 12000 12000 12000
Cash Inflow 101667 101667 101666 62000 62000 52000
Calculation of Cash Inflow of Project B
2016 2017 2018 2019 2020 2021
Net Profit 20000 30000 40000 70000 80000 65000
Add:
Depreciation 20833 20833 20833 20833 20834 20834
Cash Inflow 40833 50833 60833 90833 100834 85834
Calculation of Net Present Value
Project A
Year Cash Flow PVF@20% Present Value
of Cash Flow
-125000 1
-
1,25,000
2016 101667 0.833 84,689

2017 101667 0.694 70,557
2018 101666 0.579 58,865
2018 -35000 0.579
-
20,265
2019 62000 0.482 29,884
2020 62000 0.402 24,924
2021 52000 0.335 17,420
24000 0.335 8,040
NPV of
Project A 1,49,113
IRR 66.38%
Project B
Year Cash Flow PVF@20% Present Value
of Cash Flow
-125000 1 -125000
2016 40833 0.833 34013.889
2017 50833 0.694 35278.102
2018 60833 0.579 35222.307
2019 90833 0.482 43781.506
2020 100834 0.402 40535.268
2021 85834 0.335 28754.39
NPV of
Project B 92585
IRR 37.85%
Company has opportunity to invest in two mutually exclusive projects. We can use various
investment appraisal techniques to analyze these projects. We have used two techniques namely
Net Present Value (NPV) and Internal Rate of Return (IRR). On analysing outcome of above
techniques, we can find that both projects have positive NPV however NPV of Project A is more than
The NPV of Project B. Further IRR of Project A is also higher than Project B. On the basis of both
techniques we can say that Project A is showing better future outcomes. So it is advisable to
management to Invest in Project A.

(b)
There are various types of investment appraisal techniques to analyze Projects. Some of them are
Net Present Value, Internal Rate of return, Payback period, Accounting rate of return, discounted
cash flow methods and discounted pay-back period. These investment techniques provide greater
insight to management about Project in which management have opportunity to invest. These
techniques help management to decide about investing in Projects however these techniques have
certain limitations. Some of them are as follows:
1. It is not always possible for management to accurately estimate future cash flow from a
project.
2. Duration of cash flow from a project or machine cannot be estimated with accuracy.
Sometimes it is seen that a machine still remains useful even after its useful life.
3. Sometimes different appraisal technique provides contradictory result from other technique.
So management have to decide on which technique they want to rely.
4. Every appraisal technique use a fix cost of capital to discount cash flow from future years.
However in future years, management may have low cost source of fund. So they can
replace present debt with low cost debt.
5. All techniques ignore unexpected and unusual events that may affect project in future.