PROJECT A

Cost 180,000.00 215,000.00

Life 6.00
Salvage Value 50,000.00
Depreciation 27,500.00
Freight and Installation cost 35,000.00
Market Sale Value 45,000.00
Sales 125,000.00
Expense 55,000.00
Rate 13%

Solution
Net Cash Outlay
Cost 180,000.00
Freight and Installation cost 35,000.00

Net Cash Outlay 215,000.00

Net Cash Inflow

Year 1 Year 2 Year 3 Year 4
Sales 125,000.00 125,000.00 125,000.00 125,000.00
Expense 55,000.00 55,000.00 55,000.00 55,000.00
Depreciation 27,500.00 27,500.00 27,500.00 27,500.00
Net income before tax 42,500.00 42,500.00 42,500.00 42,500.00
Income tax 10,625.00 10,625.00 10,625.00 10,625.00
Net income after tax 31,875.00 31,875.00 31,875.00 31,875.00
Depreciation 27,500.00 27,500.00 27,500.00 27,500.00
Net Cash inflows 59,375.00 59,375.00 59,375.00 59,375.00

Terminal Cash flow

Proceeds from sale of asset 45,000.00

Tax effect on gain on sale 1,250.00
Net proceeds after tax effect 43,750.00
Release of working capital -
Terminal cash flow 43,750.00

1. Cash payback period

Net Cash Outlay 215,000.00 = 3.62 years
Net Cash inflows 59,375.00

2. Accounting rate of return

Net income before tax 42,500.00 = 20%
Net Cash Outlay 215,000.00

3. Discounted Payback
 Year 1 59,375.00 0.885 52,546.88
Year 2 59,375.00 0.783 46,490.63
Year 3 59,375.00 0.693 41,146.88
Year 4 59,376.00 0.612 36,338.11
Year 5 59,376.33 0.543 32,241.35
Year 6 59,376.83 0.480 28,500.88

215,000.00
Less 208,763.84
6,236.16
Divide 28,500.88
0.219
2.63 months
5 years and 3 months

4. Net Present Value 

PV of cash inflows - regular  59,375.000 3.998 237,381.25
PV of Terminal Cash flow      43,750.000 0.480 21,000.00
Total PV of cash inflows                                    258,381.25
Net Cash outlays or Investment costs      215,000.00
Net Present Value                                          43,381.25

5. Internal Rate of Return (IRR)

    Approximate IRR 215,000.00 59,375.00 3.62 Between 16%-17%
    Exact IRR 16% 3.685 0.06
17% 3.589
Difference  1% 0.10
Internal Rate of Return 16.67%

6.Modified Internal Rate of Return (MIRR)

Year 1 59,375.00 1.000 59,375.00

Year 2 59,375.00 1.130 67,093.75
Year 3 59,375.00 1.277 75,815.94
Year 4 59,376.00 1.443 85,673.45
Year 5 59,376.33 1.630 96,811.54
Year 6 59,376.83 1.842 109,397.97
Terminal Value 494,167.65
0.44 Between 14%-15%
    Exact MIRR 14% 0.456 0.02
15% 0.432
Difference  1% 0.02
MIRR 14.87%
 PROJ
Cost 120,000.00
Life 4.00
Salvage Value -
Depreciation
Installation and training cost 15,000.00
Market Sale Value 20,000.00
Savings 80,000.00
Increase in supply 10,000.00
Rate 15%

Solution
Net Cash Outlay
Cost 120,000.00
Installation and training cost 15,000.00
Increase in supply 10,000.00
Net Cash Outlay 145,000.00

Year 5 Year 6 Net Cash Inflow

125,000.00 125,000.00 Year 1
55,000.00 55,000.00 Savings 80,000.00
27,500.00 27,500.00 Depreciation 54,000.00
42,500.00 42,500.00 Net income before tax 26,000.00
10,625.00 10,625.00 Income tax 6,500.00
31,875.00 31,875.00 Net income after tax 19,500.00
27,500.00 27,500.00 Depreciation 54,000.00
59,375.00 59,375.00 Net Cash inflows 73,500.00

Terminal Cash flow

Proceeds from sale of asset

Tax effect on gain on sale
Net proceeds after tax effect
Release of working capital
Terminal cash flow

1. Cash payback period

Net Cash Outlay 145,000.00

Year 1 73,500.00
Year 2 70,125.00
CF 1 to 2 years 143,625.00
Remaining 1,375.00
2.25
 2. Accounting rate of return
Net income before tax 46,250.00
Net Cash Outlay 145,000.00

3. Discounted Payback
Year 1 73,500.00
Year 2 70,125.00

Year 3 66,750.00
Year 4 63,375.00

145,000.00
Less 116,959.50
28,040.50
Divide 43,921.50
0.638
7.66
2 years and 3 months

ween 16%-17% 4. Net Present Value 

PV of cash inflows - regular 
PV of Terminal Cash flow     
Total PV of cash inflows                                   
Net Cash outlays or Investment costs     
Net Present Value                                         

5. Internal Rate of Return (IRR)

    Approximate IRR 145,000.00
    Exact IRR 13%
14%
Difference  1%
Internal Rate of Return 13.53%

ween 14%-15% 6.Modified Internal Rate of Return (MIRR)

Year 1 73,500.00
Year 2 70,125.00
Year 3 66,750.00
Year 4 63,375.00
Terminal Value

    Exact MIRR 22%

23%
Difference  1%
MIRR 23.62%
 PROJECT B
135,000.00 135,000.00 135,000.00 135,000.00
4.00 3.00 2.00 1.00
10.00 10.00 10.00 10.00
0.40 0.30 0.20 0.10
54,000.00 40,500.00 27,000.00 13,500.00

Year 2 Year 3 Year 4

80,000.00 80,000.00 80,000.00
40,500.00 27,000.00 13,500.00
39,500.00 53,000.00 66,500.00
9,875.00 13,250.00 16,625.00
29,625.00 39,750.00 49,875.00
40,500.00 27,000.00 13,500.00
70,125.00 66,750.00 63,375.00

20,000.00
5,000.00
15,000.00
10,000.00
25,000.00

years
 = 32%

0.870 63,945.00
0.756 53,014.50
116,959.50
0.658 43,921.50
0.572 36,250.50

months
ars and 3 months

197,131.50
25,000.000 0.572 14,300.00
211,431.50
145,000.00
66,431.50

rn (IRR)
49,282.88 2.94 Between 13%-14%
2.974 0.03
2.914
0.06

e of Return (MIRR)
1.000 73,500.00
1.150 80,643.75
1.323 88,276.88
1.521 96,385.45
 338,806.08
0.43 Between 22%-23%
0.451 0.02
0.437
0.01
 SUMMARY AND DECISION POINTS
Project A Project B
1. Cash payback period 3.62 years 2.25
2. Accounting rate of return 20% 32%
3. Discounted Payback 5 years and 3 months 2 years and 3 months
4. Net Present Value  43,381.25 66,431.50
5. Internal Rate of Return (IRR) 16.67% 13.53%
6.Modified Internal Rate of Return (MIRR) 14.87% 23.62%
SION POINTS
Decision
Accept Project B because shorter payback period
Both are acceptable. But Project B should be prioritized.
Accept Project B because shorter payback period
Accept Project B because of higher NPV
Accept Project A because of higher IRR
Accept Project B because of higher MIRR
 OLD ASSET
Cost 85,000.00 105,000.00
Life 6.00 2.00
Salvage Value 10,000.00
Depreciation 12,500.00
Reair Cost 20,000.00
Market Sale Value 40,000.00
Sales 100,000.00 125,000.00 225,000.00
Expense 50,000.00 65,000.00 115,000.00
Rate

Solution
Net Cash Outlay
Cost 85,000.00
Reair Cost 20,000.00
Release of working capital

Net Cash Outlay 20,000.00

Net Cash Inflow

Year 1 Year 2 Year 3 Year 4
Sales 100,000.00 125,000.00 125,000.00 125,000.00
Expense 50,000.00 55,000.00 55,000.00 55,000.00
Depreciation 12,500.00 12,500.00 27,500.00 27,500.00
Net income before tax 37,500.00 57,500.00 42,500.00 42,500.00
Income tax 9,375.00 14,375.00 10,625.00 10,625.00
Net income after tax 28,125.00 43,125.00 31,875.00 31,875.00
Depreciation 12,500.00 12,500.00 27,500.00 27,500.00
Net Cash inflows 40,625.00 55,625.00 59,375.00 59,375.00

Terminal Cash flow

Proceeds from sale of asset 40,000.00

Tax effect on gain on sale (7,500.00)

Terminal cash flow #REF!

1. Cash payback period

Net Cash Outlay 20,000.00 = 0.49 years
Net Cash inflows 40,625.00

2. Accounting rate of return

Net income before tax 37,500.00 = 188%
Net Cash Outlay 20,000.00

3. Discounted Payback
Year 1 40,625.00 0.885 35,953.13
Year 2 40,625.00 0.783 31,809.38
Year 3 40,625.00 0.693 28,153.13
Year 4 59,376.00 0.612 36,338.11
Year 5 59,376.33 0.543 32,241.35
Year 6 59,376.83 0.480 28,500.88

20,000.00
Less 164,495.09
(144,495.09)
Divide 28,500.88
(5.070)
(60.84) months
5 years and 3 months

4. Net Present Value 

PV of cash inflows - regular  40,625.000 3.998 162,418.75
PV of Terminal Cash flow      #REF! 0.480 #REF!
Total PV of cash inflows                                    #REF!
Net Cash outlays or Investment costs      20,000.00
Net Present Value                                          #REF!

5. Internal Rate of Return (IRR)

    Approximate IRR 20,000.00 40,625.00 0.49 Between 16%-17%
    Exact IRR 16% 3.685 3.19
17% 3.589
Difference  1% 0.10
Internal Rate of Return 49.26%

6.Modified Internal Rate of Return (MIRR)

Year 1 59,375.00 1.000 59,375.00
Year 2 59,375.00 1.000 59,375.00
Year 3 59,375.00 1.000 59,375.00
Year 4 59,376.00 1.000 59,376.00
Year 5 59,376.33 1.000 59,376.33
Year 6 59,376.83 1.000 59,376.83
Terminal Value 356,254.17
0.06 Between 14%-15%
    Exact MIRR 14% 0.456 0.40
15% 0.432
Difference  1% 0.02
MIRR 30.66%
 NEW
Cost 150,000.00
Life 4.00
Salvage Value -
Depreciation 45,000.00
Freight and Installation cost 30,000.00
Market Sale Value 40,000.00
Sales 125,000.00
Expense 65,000.00
Rate 13%

Solution
Net Cash Outlay
Cost 150,000.00
Freight and Installation cost 30,000.00
Release of working capital 20,000.00
Proceeds from sale of old ass (40,000.00)
Tax savings due to loss on sale  (5,000.00)
Avoidable repair cost  (20,000.00)
Avoidable tax savings on repair  5,000.00
Net Cash Outlay 140,000.00

Net Cash Inflow

Year 5 Year 6 Year 1
125,000.00 125,000.00 Sales 125,000.00
55,000.00 55,000.00 Expense 65,000.00
27,500.00 27,500.00 Depreciation 32,500.00
42,500.00 42,500.00 Net income before tax 27,500.00
10,625.00 10,625.00 Income tax 6,875.00
31,875.00 31,875.00 Net income after tax 20,625.00
27,500.00 27,500.00 Depreciation 32,500.00
59,375.00 59,375.00 Net Cash inflows 53,125.00

Terminal Cash flow

Proceeds from sale of asset

Tax effect on gain on sale
Released of working capital 
Terminal cash flow

1. Cash payback period

Net Cash Outlay 140,000.00
Net Cash inflows 53,125.00

2. Accounting rate of return

Net income before tax 27,500.00
 Net Cash Outlay 140,000.00

3. Discounted Payback
Year 1 53,125.00
Year 2 53,125.00
Year 3 53,125.00
Year 4 59,376.00
Year 5 59,376.33
Year 6 59,376.83

140,000.00
Less 125,428.13
14,571.88
Divide 36,338.11
0.401
4.81
3 years and 5 months

4. Net Present Value 

PV of cash inflows - regular 
PV of Terminal Cash flow     
Total PV of cash inflows                                   
Net Cash outlays or Investment costs     
Net Present Value                                         

5. Internal Rate of Return (IRR)

ween 16%-17%     Approximate IRR 140,000.00
    Exact IRR 16%
17%
Difference  1%
Internal Rate of Return 26.93%

6.Modified Internal Rate of Return (MIRR)

Year 1 59,375.00
Year 2 59,375.00
Year 3 59,375.00
Year 4 59,376.00
Year 5 59,376.33
Year 6 59,376.83
Terminal Value
ween 14%-15%
    Exact MIRR 14%
15%
Difference  1%
MIRR 16.63%
 NEW MACHINE
180,000.00

Year 2 Year 3 Year 4 Year 5 Year 6

125,000.00 125,000.00 125,000.00 125,000.00 125,000.00
65,000.00 65,000.00 65,000.00 65,000.00 65,000.00
32,500.00 32,500.00 32,500.00 32,500.00 32,500.00
27,500.00 27,500.00 27,500.00 27,500.00 27,500.00
6,875.00 6,875.00 6,875.00 6,875.00 6,875.00
20,625.00 20,625.00 20,625.00 20,625.00 20,625.00
32,500.00 32,500.00 32,500.00 32,500.00 32,500.00
53,125.00 53,125.00 53,125.00 53,125.00 53,125.00

40,000.00
(10,000.00)
20,000.00
50,000.00

= 2.64 years

= 20%
 0.885 47,015.63
0.783 41,596.88
0.693 36,815.63
0.612 36,338.11
0.543 32,241.35
0.480 28,500.88

months
and 5 months

53,125.000 3.998 212,393.75

50,000.000 0.480 24,000.00
236,393.75
140,000.00
96,393.75

53,125.00 2.64 Between 16%-17%

3.685 1.05
3.589
0.10

e of Return (MIRR)
1.000 59,375.00
1.000 59,375.00
1.000 59,375.00
1.000 59,376.00
1.000 59,376.33
1.000 59,376.83
356,254.17
0.39 Between 14%-15%
0.456 0.06
0.432
0.02
 SUMMARY AND DECISION POIN
Project A
1. Cash payback period 3.62 years
2. Accounting rate of return 20%
3. Discounted Payback 5 years and 3 months
4. Net Present Value  43,381.25
5. Internal Rate of Return (IRR) 16.67%
6.Modified Internal Rate of Return (MIRR) 14.87%
ARY AND DECISION POINTS
Project B Decision
2.25 Accept Project B because shorter payback period
32% Both are acceptable. But Project B should be prioritized.
2 years and 3 months Accept Project B because shorter payback period
66,431.50 Accept Project B because of higher NPV
13.53% Accept Project A because of higher IRR
23.62% Accept Project B because of higher MIRR