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Assignment 1 EPM

This document analyzes two potential projects, Project X and Project Y, based on their payback periods, net present values (NPVs), and internal rates of return (IRRs). Project X costs $15,000 and is expected to generate $4,500 per year for 5 years. Project Y costs $37,500 and is expected to generate $11,100 per year for 5 years. Based on the payback period criterion, Project X would be selected, as it has a shorter payback period of 3.3333 years compared to 3.3784 years for Project Y. However, based on the NPV and IRR criteria, Project Y would be selected instead, as it has a higher NPV of

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Wajiha Jawwad
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39 views

Assignment 1 EPM

This document analyzes two potential projects, Project X and Project Y, based on their payback periods, net present values (NPVs), and internal rates of return (IRRs). Project X costs $15,000 and is expected to generate $4,500 per year for 5 years. Project Y costs $37,500 and is expected to generate $11,100 per year for 5 years. Based on the payback period criterion, Project X would be selected, as it has a shorter payback period of 3.3333 years compared to 3.3784 years for Project Y. However, based on the NPV and IRR criteria, Project Y would be selected instead, as it has a higher NPV of

Uploaded by

Wajiha Jawwad
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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NATIONAL UNIVERSITY OF SCIENCES AND

TECHNOLOGY

MILITARY COLLEGE OF SIGNALS

ENGINEERING PROJECT MANAGEMENT

ASSIGNMENT 1

SUBMITTED BY:

WAJIHA JAWWAD

BETE 54D
QUESTION:
Project X costs $15,000 and is expected to produce cash flows of $4,500 per year for 5 years.
Project Y costs $37,500 and is expected to produce cash flows of $11,100 per year for 5 years.
Calculate the two projects payback periods, NPVs and IRRs, assuming they are mutually exclusive,
and cost of capital is 14 percent.
Which project would be selected according to payback, NPV, IRR criterion? Why?

SOLUTION:

Years 0 1 2 3 4 5
Project X -15,000 4,500 4,500 4,500 4,500 4,500
Project Y -37,500 11,100 11,100 11,100 11,100 11,100

First, we will find the Payback period for both projects:

PAYBACK PERIOD
Years Project X Cumulative CF Project Y Cumulative CF
0 -15,000 -15,000 -37,500 -37,500
1 4,500 -10,500 11,100 -26,400
2 4,500 -6,000 11,100 -15,300
3 4,500 -1,500 11,100 -4,200
4 4,500 3,000 11,100 6,900
5 4,500 7,500 11,100 18,000

unrecovered amount
Payback Period of a Project: No. of years before full recovery + ( )
Total amount in full recovery period

Using this formula, we find:


1,500
• Payback Period of project X= 3+ ( ) = 3.3333 years
4,500

4,200
• Payback Period of project Y= 3+ ( ) = 3.3784 years
11,100

Acceptance Criterion
If two projects are compared, that project should be selected whose payback period is less than that of
the other project.

According to this Criteria Project X should be selected because it has a less payback period than
Project X. Meaning Project X will recover the initial investment earlier than Project Y.
Next, we will find the Net Present Values for both projects:
NET PRESENT VALUE
For project X, i =14 % i.e. 0.14
4,500 4,500 4,500 4,500 4,500
NPV = -15,000 + + + + +
(1+0.14)1 (1+0.14)2 (1.014)3 (1+0.14)4 (1+0.14)5

NPV for Project X =$ 448.8643599

For project Y, i=14 % i.e. 0.14


11,100 11,100 11,100 11,100 11,100
NPV = -37,500 + + + + +
(1+0.14)1 (1+0.14)2 (1.014)3 (1+0.14)4 (1+0.14)5

NPV for Project Y =$ 607.1987543


Acceptance Criterion
If the NPV is positive, the project should be selected, while if the NPV is negative, it should be
rejected. If two projects with positive NPVs are mutually exclusive, the one with the higher NPV
should be chosen.

According to this Criteria Project Y should be selected because it has a higher NPV than Project X.

Next, we will find the Internal Rate of Returns for both projects:
Internal Rate of Return IRR:
We calculate IRR using function in excel.

IRR for Project X


IRR for Project Y

Acceptance Criterion
For two mutually exclusive projects, select the one with greater IRR value.

According to this Criteria Project X should be selected because it has a higher IRR than Project Y.
IRR of X > IRR of Y

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