A company is considering two projects: Project A and Project B.

Project A:

• Initial investment: Rs. 500 lakhs
• Expected earnings (before depreciation and taxes) for the next five years:
  • Year 1: Rs. 200 lakhs
  • Year 2: Rs. 220 lakhs
  • Year 3: Rs. 240 lakhs
  • Year 4: Rs. 260 lakhs
  • Year 5: Rs. 280 lakhs

Project B:

• Initial investment: Rs. 450 lakhs
• Expected earnings (before depreciation and taxes) for the next five years:
  • Year 1: Rs. 180 lakhs
  • Year 2: Rs. 200 lakhs
  • Year 3: Rs. 220 lakhs
  • Year 4: Rs. 240 lakhs
  • Year 5: Rs. 260 lakhs

Both projects have the following parameters:

• Cost of capital: 10%
• Depreciation: 15% on Written Down Value basis
• Scrap value at the end of the five years: 40% of the initial investment
• Zero income tax applicable to the company

Required:

1. Calculate the net present value (NPV) of both projects.
2. Determine which project should be selected based on NPV.
3. Calculate the payback period for both projects.
4. Assess the profitability index for both projects.
5. Provide a recommendation based on the financial analysis.