Name: Mohamed Abbas Mohamed Soliman

Assignment 2: Financial feasibility study

Year Cash Flow (A) Cash Flow (B)

0 (Initial investment) 50,000 50,000
1 10,000 16,000
2 25,000 16,000
3 15,000 16,000
4 20,000 16,000
Depreciation 12500 12500
Required rate of return 15% 15%

Solution

A- Simple payback period:

Project A Project B
Year Cash Flow Compound Cash Flow
cash flow
(CCF) initial investment
SPBP= =
1 10,000 10,000 16,000 Annual cash flow
2 25,000 35,000 16,000 50000/16000=3.125 Y
3 15,000 50,000 16,000
4 20,000 70,000 16,000
SPBP= 3 years SPBP= 3 years, 1 month, 15 days
Comparing the results, we have to choose project (A), Because it has a shorter payback period. I will
choose project A because my initial cost will return in shorter period.

B- Net present value:

Project A Project B
Present value (PV) Present value (PV)
Year Cash Flow FV Cash Flow FV
PV = t
PV = t
(1+r ) (1+r )
1 10,000 8,695.65 16,000 13,913
2 25,000 18,903.59 16,000 12,098
3 15,000 9,862.74 16,000 10,520
4 20,000 11,435.06 16,000 9148
∑ PV(CF) 48,897 ∑ PV(CF) 45,680
NPV= ∑ PV(CF) – Initial investment= 48,897 - 50,000= 1
CF ⟮ 1− ⟯
-1,103 NPV= t
(1+r ) - initial investment =
r
45,680 – 50,000 = -4320

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 Calculating the NPV for both projects, we found that both projects gave us a negative value and
hence we shouldn’t choose any of them because this means that the two projects won’t even cover
their initial investment. I will reject both projects because both projects have negative value

C- The profitability index (PI):

Project A Project B
Present value(PV) Present value(PV)
Year Cash Flow FV Cash Flow FV
PV = t
PV = t
(1+r ) (1+r )
1 10,000 8,695.65 16,000 13,913
2 25,000 18,903.59 16,000 12,098
3 15,000 9,862.74 16,000 10,520
4 20,000 11,435.06 16,000 9148
∑ PV(CF) 48,897 ∑ PV(CF) 45,680
∑ PV (CF) 48897 ∑ PV (CF) 45680
PI = = =0.977 PI = = = 0.91
Initial investment 50000 Initial investment 50000
After calculating the profitability index, we decided not to invest in any of them because both
projects the profitability index are less than one which means there are no profits generated. I will
reject both projects because both projects have PI value less than 1

D- Internal rate of return (IRR):

Project A Project B
Year Cash Flow Cash Flow
0 -50000 -50000
1 10,000 16,000
2 25,000 16,000
3 15,000 16,000
4 20,000 16,000
Required rate of return 15% 15%
IRR FROM EXCEL 14% 11%
After calculating IRR, we decided not to invest in any of the projects because in
both cases the IRR was less than the required rate of return.I will reject both projects
because both projects have IRR less than required rate of return

E- Conclusion:

Project A Project B
A- SPBP Accept Reject
B- NPV Reject Reject
C- PI Reject Reject
D- IRR Reject Reject
We will not choose any of the two projects to invest in because nearly all
the methods agreed that they won’t generate profits neither cover their
initial investments. I will reject both projects because all indicators which
consider the time value of money (B-C-D) reject both projects
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