Project Evaluation for Alpha and Beta- An Example
Scenario 1: Project Alpha - Non-Discounting Methods
Payback Period
| Initial Investment |
Annual Cash Inflow |
Payback Period |
| $100,000 |
$30,000 |
3.33 years |
Decision: Accept the project as the payback period (3.33 years) is less than the cutoff period (4 years).
Accounting Rate of Return (ARR)
| Average Annual Profit After Tax |
Average Investment |
ARR (%) |
| $10,000 |
$50,000 |
20% |
Decision: A hurdle rate is needed to determine the acceptance of ARR.
Payback Period
| Year |
Cash Inflow |
Cumulative Cash Flow |
| 1 |
$10,000 |
$10,000 |
| 2 |
$20,000 |
$30,000 |
| 3 |
$30,000 |
$60,000 |
| 4 |
$40,000 |
$100,000 |
Decision: Accept the project as the payback period (4 years) is equal to the cutoff period (4 years).
Accounting Rate of Return (ARR)
| Total Cash Inflow |
Average Annual Cash Inflow |
Average Investment |
ARR (%) |
| $150,000 |
$30,000 |
$50,000 |
20% |
Decision: A hurdle rate is needed to determine acceptance.
Scenario 2: Project Beta - Discounting Methods
Net Present Value (NPV)
| Year |
Cash Flow |
Discount Factor (10%) |
Present Value |
| 1 |
$100,000 |
0.9091 |
$90,909.09 |
| 2 |
$150,000 |
0.8264 |
$123,966.94 |
| 3 |
$200,000 |
0.7513 |
$150,262.96 |
| 4 |
$250,000 |
0.6830 |
$170,747.42 |
| 5 |
$150,000 |
0.6209 |
$93,138.23 |
| Total PV of Cash Inflows |
|
|
$629,024.64 |
| NPV |
|
|
$129,024.64 |
Decision: Accept the project as the NPV is positive ($129,024.64).
Profitability Index (PI)
| Present Value of Future Cash Flows |
Initial Investment |
PI |
| $629,024.64 |
$500,000 |
1.258 |
Decision: Accept the project as PI > 1 (1.258).
Internal Rate of Return (IRR)
| IRR (%) |
Cost of Capital (%) |
Decision |
| 18.45% |
10% |
Accept |
Decision: Accept the project as IRR (18.45%) > Cost of Capital (10%).
Modified Internal Rate of Return (MIRR)
Terminal Value (TV) Calculation
| Year |
Cash Flow |
Compounded Value |
| 1 |
$100,000 |
$146,410 |
| 2 |
$150,000 |
$199,650 |
| 3 |
$200,000 |
$242,000 |
| 4 |
$250,000 |
$275,000 |
| 5 |
$150,000 |
$150,000 |
| Total TV |
|
$1,013,060 |
MIRR Calculation
| Terminal Value |
Present Value of Outflows |
MIRR (%) |
| $1,013,060 |
$500,000 |
15.27% |
Decision: Accept the project as MIRR (15.27%) > Cost of Capital (10%).
