Introduction

When a firm is presented with a capital budgeting decision, one of its first tasks
is to determine whether the project will prove to be profitable. The net present
value (NPV), internal rate of return (IRR) and payback period (PB) methods are
the most common approaches to project selection.
By considering all these approaches we chose the Project 2 because in our point
of view this project fulfils the requirements for a firm to invest. The main reason
of choosing this project is its relatively low investment and Mr. de Ville recovers
his investment within two years and it involves relatively low risk. Project 3 is
also acceptable as it has positive NPV and also have payback period of 2 years.

Pay Back Period

Payback periods are typically used when liquidity presents a major concern. If a
company only has a limited amount of funds, they might be able to only
undertake one major project at a time. Therefore, management will heavily focus
on recovering their initial investment in order to undertake subsequent projects.

Net Present Value (NPV)

Accept the project only if its NPV is positive or zero. Reject the project having
negative NPV. While comparing two or more exclusive projects having positive
NPVs, accept the one with highest NPV.

Internal Rate of Return (IRR)

The internal rate of return on an investment or project is the "annualized
effective compounded return rate" or rate of return that makes the net present
value (NPV as NET*1/(1+IRR)^year) of all cash flows (both positive and negative)
from a particular investment equal to zero.

Calculations

Projects

NPV

Payback

IRR

3437431

6 years

30.851%

44371.47

2 years

23.375%

382960.50

2 years

32.49%

1370662

7 years

15.02%

460971

1 year

Implication Of Decision
The examination of the five different projects appraisals presented here has
clearly shown that the various methods involve the risk of misinterpretation. It is
possible to get three different choices using three different methods. And this
may not always match the company's strategy. Adopting the payback rule, we
can select any of these projects because according to demand of owner that
project will be acceptable that have payback period of 3.5 years. Even the
method of internal rate of return viewed on its own provides no reliable results
for an investment decision .The opportunities identified for rendering the other
methods practically useful, indicate that application of the net present value
method is advantageous. The actual investment can be directly compared with a
reference interest rate without making any modifications. Because the capital
value is expressed in monetary units, it is simple to interpret the results. So on
the basis of all these methods we select Project 2 to invest in it.It is a short term
investment and owner would not have to wait for 30 years.it has a payback
period of 2 years which is acceptable. Project 3 is also relatively better project it
also has payback period of 2 years. Also the profitability index of both these
projects shows that we should invest in these projects. While, other projects do
not fulfil the requirements of owner.