Project Evaluation

Two mutually exclusive projects, Project M and Project N$,$ are being considered for investment.

Each project requires an initial investment of Rs$.1,00,000.$ The net cash inflows for both projects

over a $5-$year period are provided below. Determine which project is preferable based on various

capital budgeting methods considering a discount rate of $12\%$ and a tax rate of $50\%,$ with the use

of straight$-$line depreciation method.

Year Project M $($Rs$.)$ Project N $($Rs$.)$ Discount Factor $(12\%)$

$110,00030,0000\mathrm{.}893$

$240,00050,0000\mathrm{.}797$

$330,00080,0000\mathrm{.}712$

$460,00040,0000\mathrm{.}636$

$590,00060,0000\mathrm{.}567$

Discussion Questions:

$1.$ Calculate the payback period for both Project M and Project N$.$ Which project would you

recommend based on the payback period criterion?

$2.$ Compute the accounting rate of return $($ARR$)$ for each project. Which project has a

higher ARR, and what does this imply about its profitability?

$3.$ Calculate the net present value $($NPV$)$ for both Project M and Project N using a discount

rate of $12\%.$ Interpret the NPV values and recommend the more financially viable

project.

$4.$ Determine the profitability index $($PI$)$ for each project. Which project has a higher PI$,$ and

what does this indicate about the value created per rupee of investment?

$5.$ Compute the internal rate of return $($IRR$)$ for both Project M and Project N$.$ Discuss

which project offers a higher IRR and its significance in investment decision$-$making.