Managing Financial Resources: Investment Appraisal for PNJ Ltd

This report assesses capital investment appraisal techniques for PNJ Ltd, a wood products company evaluating replacement equipment. It explains and applies methods like Payback Period, Internal Rate of Return (IRR), Net Present Value (NPV), and Accounting Rate of Return (ARR) to four potential investment options (Projects A, B, C, and D). The analysis includes calculations and appraisals of each project, highlighting the discount rate used and its rationale. Furthermore, the report outlines potential risks associated with Project C, such as financial, market, legal, and interest rate risks, and their likely impact on management. Finally, it summarizes possible sources of funding for the project, detailing the advantages and disadvantages of each option. The document is available on Desklib, a platform offering study tools and solved assignments for students.

Running head: MANAGING FINANCIAL RESOURCES AND DECISION
Managing Financial Resources and
Decisions

MANAGING FINANCIAL RESOURCES AND DECISIONS
2
Table of Contents
An explanation of each of the following capital investment appraisal techniques..........................3
Calculate the four investment options using the above capital investment appraisal techniques.
Appraise the results and include an explanation of which discount rate was used and why...........5
An outline of the potential risks involved with this project, and an explanation of their likely
impact............................................................................................................................................11
A summary of possible sources of funding for the project, outlining the advantages and
disadvantages of each....................................................................................................................14
Bibliography..................................................................................................................................17
Appendices....................................................................................................................................19

MANAGING FINANCIAL RESOURCES AND DECISIONS
3
An explanation of each of the following capital investment appraisal techniques
Investment appraisal techniques are used to assess the feasibility of projects in terms of long-
term investment. This technique can be practiced by PNJ Ltd to assess new projects by using the
cash flow of projects and their present value. There is a certain technique of investment appraisal
to assess the appropriateness of projects such as NPV, IRR, ARR, and Payback period.1
Payback Period Method
Payback period is a significant criterion for choosing the project. It defines the length of time
required for recovering the cost of investment. A project can be selected while the value of PBP
is below and equal to the expectation of management. After Payback period, a company can start
to get earning profits.2
The given formula is used to calculate the Payback period.
Payback Period Method =n+ ( initial investment – a themount of cash flows )
cash inflow∈next year
Internal Rate of Return (IRR):
The internal rate of return is the interest rate at which net present value of all cash flows (both
favorable and unfavorable) from an investment equal to zero. In addition, the internal rate of
return is implemented to assess the attractiveness of the investment. The company can invest in a
1 Fadi Alkaraan, ‘Strategic investment decision-making–Scanning and screening investment opportunities: The
expansion of Guinness in West Africa’ (2016) 24 (4) Meditari Accountancy Research 505-526.
2 A Bogoviz and S. Mezhov, ‘Models and tools for research of innovation processes’ (2015) 9 (3) Modern Applied
Science 159.

MANAGING FINANCIAL RESOURCES AND DECISIONS
4
project only when the cost of capital would be higher than the IRR.3 The given formula would be
used to calculate the IRR:
IRR=Lowerrate+ NPVatlowerrate
NPVatlowerrate−NPVatupperrate × ( Hig h errate−Lowerrate )
Net Present Value Method
Net present value can be illustrated as the differentiation between total PV of cash inflows and its
initial outlays. It indicates the value that investment will add to the business of a company. It also
defines the potential profits that a project will obtain. The decision will be made on the basis of
the favorable and unfavorable value of the project. In case, a project has a positive value of NPV
then it could be selected by the company. In addition to this, in the case of two or more projects,
the choice of project will rely on a higher positive value of NPV.4
The given formula is used to assess the net present value of the project:
NPV=Total Present Value of Cash Inflows-Initial Investment
Accounting rate of return
The accounting rate of return technique assesses the return created from the average net income
projected for each of the years. In addition, the proposed capital investment is expected to be
practiced in the operations.5
The given below formula is used to calculate the accounting rate of return:
3 Ming-Gao Dong and Shou-Yi Li, ‘Project investment decision making with fuzzy information: A literature review
of methodologies based on taxonomy’ (2016) 30 (6) Journal of Intelligent & Fuzzy Systems 3239-3252.
4 Timothy J Foxon, Catherine SE Bale, Jonathan Busch, Ruth Bush, Stephen Hall, and Katy Roelich, ‘Low carbon
infrastructure investment: extending business models for sustainability’ (2015) 2 (1) Infrastructure Complexity 4.
5 Anthony Paul Higham, Chris Fortune, and J. C. Boothman, ‘Sustainability and investment appraisal for housing
regeneration projects’ (2016) 34 (2)Structural Survey 150-167.

MANAGING FINANCIAL RESOURCES AND DECISIONS
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ARR= AverageIncome
AverageInvestment
Calculate the four investment options using the above capital investment appraisal
techniques. Appraise the results and include an explanation of which discount rate was
used and why
Payback period
Payback Period (Project A)
Years Net Cash Flow (£’000) Cumulative cash Flow (£’000)
0 -100 -100
1 25 -75
2 24 -51
3 22 -29
4 10 -19
5 16 -3
5 20 17
Payback Period (Project B)
Years Net Cash Flow (£’000)
0 -150
1 50
2 40
3 40
4 10
5 10
5 5
Payback Period (Project B)
Net Cash Flow (£’000) Cumulative cash Flow (£’000)
-150 -150
50 -100
40 -60
40 -20
10 -10
10 0
5 5

MANAGING FINANCIAL RESOURCES AND DECISIONS
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Payback Period (Project C)
Years Net Cash Flow (£’000) Cumulative cash Flow (£’000)
0 -175 -175
1 50 -125
2 40 -85
3 50 -35
4 40 5
5 40 45
5 15 60
As per the above results, it can be stated that project D will be selected by PNJ Ltdas compared
to three different projects as it takes less period i.e. 3.5 years to recover the cost of projects and
starts to earn profits.
NPV
Net Present Value (Project A)
Years
Cash Flow
(£’000) PV factor@8% PV of cash flow (£’000)
0 -100 1.000 -100
1 25 0.926 23.148
2 24 0.857 20.576
3 22 0.794 17.464
4 10 0.735 7.350
5 16 0.681 10.889
5 20 0.681 13.612
Total present value
of cash flow -6.96
Net Present Value -6.96

MANAGING FINANCIAL RESOURCES AND DECISIONS
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Net Present Value (Project B)
Years Cash Flow (£’000) PV factor@8% PV of cash flow (£’000)
0 -150 1.000 -150
1 50 0.926 46.296
2 40 0.857 34.294
3 40 0.794 31.753
4 10 0.735 7.350
5 10 0.681 6.806
5 5 0.681 3.403
Total present value of cash flow -20.10
Net Present Value -20.10
Net Present Value (Project C)
Years Cash Flow (£’000) PV factor@8% PV of cash flow (£’000)
0 -175 1.000 -175
1 50 0.926 46.296
2 40 0.857 34.294
3 50 0.794 39.692
4 40 0.735 29.401
5 40 0.681 27.223
5 15 0.681 10.209
Total present value of cash flow 12.11
Net Present Value 12.11
Net Present Value (Project D)
Years
Cash Flow
(£’000) PV factor@8%
PV of cash flow
(£’000)
0 -200 1.000 -200
1 60 0.926 55.556
2 70 0.857 60.014
3 60 0.794 47.630
4 20 0.735 14.701
5 30 0.681 20.417
5 10 0.681 6.806
Total present value of cash flow 5.12
Net Present Value 5.12

MANAGING FINANCIAL RESOURCES AND DECISIONS
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As per the above analysis, it can be stated that project C will be selected by PNJ Ltd as it has a
higher positive value i.e. 12.11 as compared to other projects.
IRR
Internal rate of return (Project A)
Years Cash Flow (£’000)
0 -100
1 25
2 24
3 22
4 10
5 16
5 20
IRR 5%
Assumption of cost of capital 8%
Internal rate of return (Project B)
Years Cash Flow (£’000)
0 -150
1 50
2 40
3 40
4 10
5 10
5 5
IRR 1%
Assumption of cost of capital 8%

MANAGING FINANCIAL RESOURCES AND DECISIONS
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Internal rate of return (Project C)
Years Cash Flow (£’000)
0 -175
1 50
2 40
3 50
4 40
5 40
5 15
IRR 10%
Assumption of cost of capital 8%
Internal rate of return (Project D)
Years Cash Flow (£’000)
0 -200
1 60
2 70
3 60
4 20
5 30
5 10
IRR 9%
Assumption of cost of capital 8%
The above chart depicts that Project C will be selected by PNJ Ltd as it has a higher internal rate
of return i.e. 10% as compared to the cost of capital (i.e. 8%). The ranking of project selection
under IRR is done according to the higher value of the project.
ARR

MANAGING FINANCIAL RESOURCES AND DECISIONS
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Accounting rate of return (Project A)
Years Cash Flow (£’000)
0 -100
1 25
2 24
3 22
4 10
5 16
5 20
Sum of cash flow 17
ARR 17.00%
Accounting rate of return (Project B)
Years Cash Flow (£’000)
0 -150
1 50
2 40
3 40
4 10
5 10
5 5
Sum of cash flow 5
ARR 3.33%
Accounting rate of return (Project C)
Years Cash Flow (£’000)
0 -175
1 50
2 40
3 50
4 40
5 40
5 15
Sum of cash flow 60
ARR 34.29%

MANAGING FINANCIAL RESOURCES AND DECISIONS
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Accounting rate of return (Project D)
Years Cash Flow (£’000)
0 -200
1 60
2 70
3 60
4 20
5 30
5 10
Sum of cash flow 50
ARR 25.00%
According to the above analysis, it can be stated that PNJ Ltd will select project C as it has a
higher ARR i.e. 34.29% as compared to other projects.
An outline of the potential risks involved with this project, and an explanation of their
likely impact
There are different types of risks that could be involved with project C such as financial risk, risk
of the time value of money, market risk, legal risk, and interest rate risk. It is discussed as given
below:
Financial Risk:
There is a risk that funds increased for the project is limited to accomplish the project
deliverables. Under such case, the fund would be inadequate and the success of the project may
become unsure. In the case of Project C, the inadequacy of funding may influence the
implementation and success of project unfavorably.6
Risk of Time Value of Money:
6 Aleksandr Mikhaylovich Batkovskiy, E. Yu Khrustalev, and O. E. Khrustalev, ‘Models and methods for evaluating
operational and financial reliability of high-tech enterprises’ (2016) 11 (7) Journal of Applied Economic Sciences.
Romania: European Research Centre of Managerial Studies in Business Administration 45.

MANAGING FINANCIAL RESOURCES AND DECISIONS
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The time value of money defines that the value of money of current times will not remain the
same after two or more ages. It indicates the value of money is depleted over time. In addition,
time value of money may affect the future cash flows of the project in a negative way. Hence, it
is required for the project manager to focus on the time value of money in making a decision of
investment.7
Market Risk:
The accomplishment of project C would rely on different external market factors such as high
rivalry, changes in demand, suppliers unable to supplied expected products and services, and the
emergence of a price war.8
Legal Risk:
The legal risk could be arisen in project C due to changes in regulatory and legal regulation and
policies in a nation. For instance, a legal ban on sand mining is a key example of a legal risk that
may affect the construction projects unfavorably in different nations. 9
Interest Rate Risk:
The rate of interest of a nation changes with the alteration in government policies such as
monetary and fiscal regulations. The high-interest rate may unfavorably influence the cost of
7 Moataz Moamen Elmassri, Elaine Pamela Harris, and David Bernard Carter, ‘Accounting for strategic investment
decision-making under extreme uncertainty’ (2016) 48 (2) The British Accounting Review 151-168.
8 Matteo Rossi, ‘The use of capital budgeting techniques: an outlook from Italy’ (2015) 8 (1) International Journal of
Management Practice 43-56.
9 M. V. Shivaani, P. K. Jain, and Surendra S. Yadav, ‘Perceptual Mapping of Capital Budgeting Techniques:
Empirical Evidence from Corporate Enterprises in India’ (2017) 42 (4) Research Bulletin 106-112.

MANAGING FINANCIAL RESOURCES AND DECISIONS
13
financing for the projects as well as the cost of projects. The changes in interest rate risk can
influence the investment decision of project manager and PNJ Ltd Company.10
Other Risks Associated with KPMG Employee Venturing Project:
Project C of PNJ Ltd may also face the risk associated with failure of business experimentation,
the inadequate presence of human resources with the right talent, skills, licensing concerns, and
regulatory disturbances.11
Implications of the Project Risks on Management:
The risk entailed in project implementation may influence the investment decision. The
management of PNJ Ltd may take decision associated with choice and acceptance of the project
after consideration of risk involved in the project. Moreover, the selection of a project relies on
the key result of a project that is obtained from IRR, NPV and payback period.12 Management of
PNJ Ltd will select those projects that support local regulation of nation required for the start-up
of a business. Moreover, the project risk can also affect the investment decision of a company.
For instance, on the basis of interest rate, a project manager can make a decision regarding
whether the project should be financed via debt capital or equity.13
10 Abduallah Al-Mutairi, Kamal Naser, and Muna Saeid, ‘Capital budgeting practices by non-financial companies
listed on Kuwait Stock Exchange (KSE)’ (2018) 6 (1) Cogent Economics & Finance 1468232
11 Irem Ucal Sari, and Cengiz Kahraman, ‘Interval type-2 fuzzy capital budgeting’ (2015) 17 (4) International
Journal of Fuzzy Systems 635-646.
12 de Andrés, Pablo, Gabriel de Fuente, and Pablo San Martín, ‘Capital budgeting practices in Spain’ (2015) 18 (1)
BRQ Business Research Quarterly 37-56.
13 Peter J Graham, and Milind Sathye, ‘Does National Culture Impact Capital Budgeting Systems?’ (2017) 11 (2)
Australasian Accounting, Business and Finance Journal 43-60.

MANAGING FINANCIAL RESOURCES AND DECISIONS
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A summary of possible sources of funding for the project, outlining the advantages and
disadvantages of each
PNJ Ltd can use the internal sources of finance as it would be significant with the perspective of
business in order to eliminate the additional expense. The company can also use the sale of assets
as a source of finance because it would be cost-effective for the business. Another cause of using
this source is that there would be no need to repay the principal amount with interest. However,
there is some disadvantageous of using these sources like when the requirement of same assets
that are sold in future then the use of this source of financing would be costly. Since, it would
unable the business for creating the income from these assets.14
As per this statement, it can be stated that PNJ Ltd have low profits and it has requirement of
high capital, which indicates that PNJ Ltd cannot use the retained earnings because of low profit
earned by the company in previous years. On the other side, the other source of financing is the
saving of owner that could be invested by the owner as it is long-term financing that comes from
own saving.15
PNJ Ltd can use the external sources of financing that would enable the business for attaining the
high amount of capital requirement. Moreover, the company can use the bank loan with respect
to financing purpose because of fixed assets and positive business experience. It would enable
the company for arranging the fund for long-terms with the paybacks of tax rebate on payment of
interest.16 This is significant for declining the cost of financing. But, at the same time, there are
14 Tarun Mukherjee, Naseem Al Rahahleh, and Walter Lane, ‘The capital budgeting process of healthcare
organizations: a review of surveys’ (2016) 61 (1) Journal of Healthcare Management 58-76.
15 Roopali Batra, and Satish Verma, ‘Capital budgeting practices in Indian companies’ (2017) 29 (1) IIMB
Management Review 29-44.

MANAGING FINANCIAL RESOURCES AND DECISIONS
15
some disadvantageous to borrow fund from the banks because the bank takes interest in against
the principal amount and it has repaid at the predetermined date on a regular base.17
PNJ Ltd can issue the debenture because of tax benefit for the company. Furthermore, debenture
interests are paid in against the profit and company uses it as expenses. Moreover, debenture
holder cannot participate in business as, the company may take a free decision. This source may
generate additional expenses for a business that may affect the profitability of the business. PNJ
Ltd can take capital from venture capitalists in which risk is low. Furthermore, the venture
capitalists will share the ownership in accordance with capital.18
PNJ Ltd can use the bank loan and saving of owner as a source of finance to select the projects.
There are certain types of costs that could be existed as the source of financing. In the case of
practicing the bank loan, there could be several costs like the cost of obtaining a business plan,
interest charge, and cost of obtaining a financial statement.19 Another cost is related to initial
arrangement fees for covering lender cost, administrative fees, and late payment fees. It could be
variable and fixed costs. Moreover, in the case of utilizing own savings, there would be no
16 Dennis Schlegel, Franziska Frank, and Bernd Britzelmaier, ‘Investment decisions and capital budgeting practices
in German manufacturing companies’ (2016) 16 (1) International Journal of Business and Globalisation 66-78.
17 Afonso Carneiro Lima, José Augusto Giesbrecht da Silveira, Fátima Regina Ney Matos, and André Moura
Xavier, ‘A qualitative analysis of capital budgeting in cotton ginning plants’(2017) 14 (3) Qualitative Research in
Accounting & Management 210-229.
18 Mathew Hayward, Andrew Caldwell, John Steen, David Gow, and Peter Liesch, ‘Entrepreneurs’ capital budgeting
orientations and innovation outputs: Evidence from Australian biotechnology firms’ (2017) 50 (2) Long Range
Planning 121-133.
19 de Andrés, Pablo, Gabriel de Fuente, and Pablo San Martín, ‘Capital budgeting practices in Spain’ (2015) 18 (1)
BRQ Business Research Quarterly 37-56.

MANAGING FINANCIAL RESOURCES AND DECISIONS
16
additional costs related to types of finance. However, when a company invests in more money in
projects then it could dilute the ownership.20
A fully justified recommendation for one of the investment options
As per the above analysis, it can be recommended that company can practice three techniques
such as Payback period, NPV and ARR for making an investment decision. On the basis of the
Payback period, it can be assessed that PNJ Ltd should select the project C as this project will
recover the initial cost in minimum time i.e. 3.8 years. In addition, it is equal to targeted value
i.e. 5 years.
After assessing the NPV, it can be suggested that PNJ Ltd should select the project C as it has
obtained higher positive value. From the analysis of ARR, it can be also recommended that PNJ
Ltd should select the project C as it has obtained a higher return. As a result, it can be stated that
this project will create a maximum return in minimum risk for PNJ Ltd. Thus, the company
should invest in project C for acquiring higher profits.
20 Peter J Graham, and Milind Sathye, ‘Does National Culture Impact Capital Budgeting Systems?’ (2017) 11 (2)
Australasian Accounting, Business and Finance Journal 43-60.

MANAGING FINANCIAL RESOURCES AND DECISIONS
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Bibliography
Alkaraan F, ‘Strategic investment decision-making–Scanning and screening investment
opportunities: The expansion of Guinness in West Africa’ (2016) 24 (4) MAR 505-526
Bogoviz A and Mezhov S, ‘Models and tools for research of innovation processes’ (2015) 9 (3)
Modern Applied Science 159
Dong MG and Li SY, ‘Project investment decision making with fuzzy information: A literature
review of methodologies based on taxonomy’ (2016) 30 (6) JIFS 3239-3252
Batkovskiy AM, Khrustalev, EY, and Khrustalev O E, ‘Models and methods for evaluating
operational and financial reliability of high-tech enterprises’ (2016) 11 (7) JAES. RECMSBA 45
Foxon TJ, SE Bale C, Busch J, Bush R, Hall S, and Roelich K, ‘Low carbon infrastructure
investment: extending business models for sustainability’ (2015) 2 (1) IC 4
Paul Higham A., Fortune C, and Boothman JC, ‘Sustainability and investment appraisal for
housing regeneration projects’ (2016) 34 (2) SS 150-167
Elmassri M, Harris EP, and Carter DB. ‘Accounting for strategic investment decision-making
under extreme uncertainty’ (2016) 48 (2) BAR 151-168
Rossi M, ‘The use of capital budgeting techniques: an outlook from Italy’ (2015) 8 (1) IJMP 43-
56
Shivaani MV, Jain PK, and Yadav SS, ‘Perceptual Mapping of Capital Budgeting Techniques:
Empirical Evidence from Corporate Enterprises in India’ (2017) 42 (4) RB 106-112
Al-Mutairi A, Naser K, and Saeid M, ‘Capital budgeting practices by non-financial companies
listed on Kuwait Stock Exchange (KSE)’ (2018) 6 (1) CEF 1468232.
Sari IU, and Kahraman C, ‘Interval type-2 fuzzy capital budgeting’ (2015) 17 (4) IJFS 635-646

MANAGING FINANCIAL RESOURCES AND DECISIONS
18
Pablo DA, Fuente GD, and Martín PS, ‘Capital budgeting practices in Spain’ (2015) 18 (1) BRQ
37-56
Graham PJ, and Sathye M, ‘Does National Culture Impact Capital Budgeting Systems?’ (2017)
11 (2) AABFJ 43-60.
Mukherjee T, Al Rahahleh N, and Lane W, ‘The capital budgeting process of healthcare
organizations: a review of surveys’ (2016) 61 (1) JHM 58-76
Batra R and Verma S, ‘Capital budgeting practices in Indian companies’ (2017) 29 (1) IIMB MR
29-44.
Schlegel D, Frank F, and Britzelmaier B, ‘Investment decisions and capital budgeting practices
in German manufacturing companies’ (2016) 16 (1) IJBG 66-78
Lima AC, José da Silveira AG, Matos FRN, and Xavier AM, ‘A qualitative analysis of capital
budgeting in cotton ginning plants’(2017) 14 (3) QRAM 210-229
Hayward M, Caldwell A, Steen J, Gow D, and Liesch P, ‘Entrepreneurs’ capital budgeting
orientations and innovation outputs: Evidence from Australian biotechnology firms’ (2017) 50
(2) LRP 121-133

MANAGING FINANCIAL RESOURCES AND DECISIONS
19
Appendices
Payback period
Payback Period (Project A)
Years Net Cash Flow (£’000) Cumulative cash Flow (£’000)
0 -100 -100
1 25 -75
2 24 -51
3 22 -29
4 10 -19
5 16 -3
5 20 17
Payback Period (Project B)
Years Net Cash Flow (£’000)
0 -150
1 50
2 40
3 40
4 10
5 10
5 5
Payback Period (Project B)
Net Cash Flow (£’000) Cumulative cash Flow (£’000)
-150 -150
50 -100
40 -60
40 -20
10 -10
10 0
5 5

MANAGING FINANCIAL RESOURCES AND DECISIONS
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Payback Period (Project C)
Years Net Cash Flow (£’000) Cumulative cash Flow (£’000)
0 -175 -175
1 50 -125
2 40 -85
3 50 -35
4 40 5
5 40 45
5 15 60
NPV
Net Present Value (Project A)
Year
s
Cash Flow
(£’000) PV factor@8% PV of cash flow (£’000)
0 -100 1.000 -100
1 25 0.926 23.148
2 24 0.857 20.576
3 22 0.794 17.464
4 10 0.735 7.350
5 16 0.681 10.889
5 20 0.681 13.612
The total present
value of cash flow -6.96
Net Present Value -6.96
Net Present Value (Project B)

MANAGING FINANCIAL RESOURCES AND DECISIONS
21
Year
s
Cash Flow
(£’000) PV factor@8% PV of cash flow (£’000)
0 -150 1.000 -150
1 50 0.926 46.296
2 40 0.857 34.294
3 40 0.794 31.753
4 10 0.735 7.350
5 10 0.681 6.806
5 5 0.681 3.403
Total present value of cash flow -20.10
Net Present Value -20.10
Net Present Value (Project C)
Year
s Cash Flow (£’000) PV factor@8% PV of cash flow (£’000)
0 -175 1.000 -175
1 50 0.926 46.296
2 40 0.857 34.294
3 50 0.794 39.692
4 40 0.735 29.401
5 40 0.681 27.223
5 15 0.681 10.209
Total present value of cash flow 12.11
Net Present Value 12.11

MANAGING FINANCIAL RESOURCES AND DECISIONS
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Net Present Value (Project D)
Year
s
Cash Flow
(£’000) PV factor@8%
PV of cash flow
(£’000)
0 -200 1.000 -200
1 60 0.926 55.556
2 70 0.857 60.014
3 60 0.794 47.630
4 20 0.735 14.701
5 30 0.681 20.417
5 10 0.681 6.806
Total present value of cash
flow 5.12
Net Present Value 5.12
IRR
Internal rate of return (Project A)
Years Cash Flow (£’000)
0 -100
1 25
2 24
3 22
4 10

MANAGING FINANCIAL RESOURCES AND DECISIONS
23
5 16
5 20
IRR 5%
Assumption of the cost of
capital 8%
Internal rate of return (Project B)
Years
Cash Flow
(£’000)
0 -150
1 50
2 40
3 40
4 10
5 10
5 5
IRR 1%
Assumption of cost of capital 8%
Internal rate of return (Project C)
Years Cash Flow (£’000)
0 -175
1 50

MANAGING FINANCIAL RESOURCES AND DECISIONS
24
2 40
3 50
4 40
5 40
5 15
IRR 10%
Assumption of cost of capital 8%
Internal rate of return (Project D)
Years Cash Flow (£’000)
0 -200
1 60
2 70
3 60
4 20
5 30
5 10
IRR 9%
Assumption of cost of capital 8%
ARR
Accounting rate of return (Project A)
Years Cash Flow (£’000)

MANAGING FINANCIAL RESOURCES AND DECISIONS
25
0 -100
1 25
2 24
3 22
4 10
5 16
5 20
Sum of cash flow 17
ARR 17.00%
Accounting rate of return (Project B)
Years Cash Flow (£’000)
0 -150
1 50
2 40
3 40
4 10
5 10
5 5
Sum of cash flow 5
ARR 3.33%
Accounting rate of return (Project C)

MANAGING FINANCIAL RESOURCES AND DECISIONS
26
Years Cash Flow (£’000)
0 -175
1 50
2 40
3 50
4 40
5 40
5 15
Sum of cash flow 60
ARR 34.29%
Accounting rate of return (Project D)
Years Cash Flow (£’000)
0 -200
1 60
2 70
3 60
4 20
5 30
5 10
Sum of cash flow 50
ARR 25.00%