1/

1. Elvira Co is contemplating three available investment opportunities, the cash flows of

which are as follows:
Year 0 1 2 3 4 5
Project A -100 40 40 40 40 -
Project B -120 10 10 10 10 200
Project C -150 100 80 - - -

In each case the initial investment represents the purchase of plant and machinery,
whose realisable value will be 10% of initial cost, receivable in addition to the above
flow at the end of the life of the project.
Required:
Advise Elvira Co on which project it should accept, taking as your investment
criterion the following alternative measures:
a) payback period;
b) return on capital employed (accounting rate of return) on average investment;
c) net present value at a 15% discount rate; and
d) internal rate of return.

a/
Payback period:

Year 0 1 2 3 4 5
Project A -100 40 40 40 40 -
Project B -120 10 10 10 10 200
Project C -150 100 80 - - -
-370 150 130 50 50 200
DF@10% 1 0.909 0.826 0.751 0.683 0.621
Discounted cashflow -370 136.35 107.38 37.55 34.15 124.2
Cumulative cashflow -370 -233.65 -126.27 -88.72 -54.57 69.63
0.439372
Payback period 4.43 years

b/

c/
Year 0 1 2 3 4 5
Project A -100 40 40 40 40 -
Project B -120 10 10 10 10 200
Project C -150 100 80 - - -
 Net cash inflow -370 150 130 50 50 200
DF@15% 1 0.87 0.756 0.658 0.572 0.497
Pair value -370 130.5 98.28 32.9 28.6 99.4
NPV 19.68

d/
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