In this assignment, NPV, PPA, IRR and CBA stand for net present value, payback period analysis, internal rate of return and cost-benefit analysis, respectively. They represent four project appraisal techniques.

Part A

(1) A, B and C are three options of a project. They are mutually exclusive. Table 1 shows the initial capital cost, annual income, and annual expenditure of each option. The three options have the same economic life of 10 years. Assuming the discount rate of 8%, determine the acceptability of each option and then select the best option using the NPV method.

Table 1

Option A Option B Option C

Initial capital cost 10.0 million 15.0 million 17.0 million

Annual income 5.0 million 7.0 million 8.0 million

Annual expenditure 2.0 million 3.0 million 4.0 million

(2) For the three options of the project in Table 1, calculate the payback period of each option and then select the best option through PPA with interest.

(3) Compare the result of NPV and the result of PPA. Explain why there is difference between NPV selection and PPA selection.

Part B

(1) Discuss equal economic life and unequal economic life for two or more options of a project when using NPV for the comparison between them.

(2) What are the criteria to appraise one project option using NPV, IRR and CBA, respectively? What are the criteria to appraise and compare two or more project options using NPV, IRR and CBA, respectively? Explain the reasons why.

(3) Compare NPV, IRR and CBA as three important project appraisal techniques based on your understanding.