Problem 4. A choice is to be made between two competing proposals which require equal investment of Re. 50,000 and are expected to generate net cash flows as under. Year Project I Project 1 PIV at 10% Pra Rs. Rs. 1 25,000 10,000 909 2 15,000 12,000 826 3 10,000 18,000 751 4 Nil 125,000 683 5 12,000 8,000 621 6 6.000 4,000 564 Which project proposal should be chosen and why ? Evaluate the project propos under discounted cash flow methods. [M.Sc ITM May 2000 Periy: Solution : Net Cash Inflows Year Project I Project I Rs. Rs. 1 25,000 10,000 2 15,000 12,000 3 10,000 18,000 4 Nil 25,000 5 12,000 8,000 6 6,000 4,000 Pay back period under Traditional method Project I I year I year Ml year Pay back period is 3 years. T year I year III year Balance 25,000 15,000 110,000 50,000 Project I 10,000 <8 years 4 months er x 10,000 = 4.8 ie, 4 ‘As per Traditional pay back period Project I is recommended because it has shorter | back period. Discounted cash flow methodProject 1 Project IT Cash Inflows | Discount | Present Cash Inflows | Discount | Presen Year Bs. Factor at | Value | Year Rs. Factor at | Value 10% pa. | Rs. 10% pa | Rs. 1 25,000 ooo | 22,725 | 1 10,000 909) 9,00 2 15,000 ea | 12,900 | 2 12,000 826 991 3 10,000 781 7510 | 3 18,000 751 13,61 4 ‘Nil 683 —|4 25,000 683 1707 5 12,000 621 7452 | 5 8,000 621 496: 6 6.000 564 aaa | 6 4.000 564 2.251 ‘Total present value | 53,461 ‘Total present value | 56,81! Less : Original Cost | 50,000 Less ; Original Cost | 50,001 Net Present Value [3401 Net Prevent Value [~ 6811 Criteria Project X Project Y Pay back period 3 years 3 years 4 months NPV Rs. 3491 Rs. 6,819 As per the pay back period point of view, Project X is recommended. But by NPV p of view, Project Y is recommended because it has surplus of Rs. 6,819.payoint