SASCO pvt ltd company is a salt trading company.

The company situated in

kollappuram, azad nagar, A.R Nagar- po, malappuram-dt, Kerala-st, India. The
Company distributes its products primarily in domestic markets. Sasco salt trade
premium quality free flow iodized salt. The company not compromise quality of
the product.
The company have 10 employee 1 manager 1 accountant 4 marketers, 6
production, they are producing 95000kg per month they selling price is Rs 7, and
the material cost is 2.5/kg direct labor cost is 385 and marketers 400 for manager
13000 and accountant 10000 electricity bill 5000.

PROFIT AND LOSS ACOUNT OF 2014

'Profit and Loss Statement - P&L'A financial statement that summarizes the
revenues, costs and expenses incurred during a specific period of time - usually a
fiscal quarter or year. These records provide information that shows the ability of a
company to generate profit by increasing revenue and reducing costs. The P&L
statement is also known as a "statement of profit and loss", an "income statement"
or an "income and expense statement".

Sale
Cost of sale

95000*12=*7

Direct material
Direct labor
Electricity
Rent
Packaging
cover

2.5*1140000
.6*1140000
.05*1140000
.1*1140000
1*1140000

7890000

2850000
684000
57000
114000
1140000

(4845000)

GP

3045000

499200
156000
120000
12000

(787200)

Less admin
cost
Marketing
manager
accountant
Phone bill

Profit
Interest on
loan 12%
200000
Interest on
debenture 10%
of 400000
Profit before
tax
Tax 20 %
Profit after
tax
preference
12% of 400000
Equity
Retained
earnings

2257800

24000

40000

64000
2193800

438760
1755040

48000
1608360
98680

Balance Sheet' A financial statement that summarizes a company's assets, liabilities

and shareholders' equity at a specific point in time. These three balance sheet
segments give investors an idea as to what the company owns and owes, as well as
the amount invested by the shareholders.

BALANCE SHEET OF 2014

RS
Fixed Asset:
Land
Building and Equipment

RS

RS

298680
200000
498680

Current asset:

Cash and bank

Total Asset
EQUITY:
3000 ORDINARY SHARE OF rs.100
EACH
RETAINED EARNINGS
PREFERANCE SHARE
12%
TOTAL EQUITY
NON CURRENT
LIABILTY:
DEBENTURE 10% OF 400000
LOAN 12% OF 200000
CURRENT LIABILTY:
CREDITORS
TOTAL EQUITY AND LIABILITY

100000
0

1000000
1498680

300000
98680
400000
798680
400000
200000

600000

100000
100000
1498680

Budgeted Ratio Analysis

is a form of Financial Statement Analysis that is used to obtain a quick indication
of a firm's financial performance in several key areas. Financial ratios are
mathematical comparisons of financial statement accounts or categories. These

relationships between the financial statement accounts help investors, creditors,

and internal company management understand how well a business is performing
and areas of needing improvement.

LIQUIDITY RATIOS
A class of financial metrics that is used to determine a company's ability to pay off
its short-terms debts obligations. Generally, the higher the value of the ratio, the
larger the margin of safety that the company possesses to cover short-term debts.
Liquidity ratios are the ratios that measure the ability of a company to meet its
short term debt obligations. These ratios measure the ability of a company to pay
off its short-term liabilities when they fall due.
The liquidity ratios are a result of dividing cash and other liquid assets by the short
term borrowings and current liabilities. They show the number of times the short
term debt obligations are covered by the cash and liquid assets. If the value is
greater than 1, it means the short term obligations are fully covered.

CURRENT RATIO
An indication of a company's ability to meet short-term debt obligations the higher
the ratio, the more liquid the company is. Current ratio is equal to current
assets divided by current liabilities. If the current assets of a company are more
than twice the current liabilities, then that company is generally considered to have
good short-term financial strength. If current liabilities exceed current assets, then
the company may have problems meeting its short-term obligation.

Current Ratio

Current Assets
Current Liabilities

2189800/495200 = 4.42
Analysis.

Acid-test ratio
The term Acid-test ratio is also known as quick ratio. The most basic definition
of acid-test ratio is that, it measures current (short term) liquidity and position of
the company. To do the analysis accountants weight current assets of the company
against the current liabilities which result in the ratio that highlights the liquidity of
the company. The acid-test ratio is a measure of how well a company can meet its
short-term financial liabilities.
If the value of the acid-term ratio is less than 1, then it is said that such a company
is not stable and may face difficulty is paying off their debts (short term). In order
to clear the short term debts they probably would need to sell some of their assets.
But such an option affects the overall position of the company because if the
company owns very little assets.
Acid ratio = (Current Assets Inventory) / Current liabilities
= (218900 84000) / 495200
= 4.25

Stock Turnover Ratio

The inventory turnover formula or stock turnover ratio is the rate at which
inventory is used over a measurement period. Inventory turnover is typically
measured on a trend line or in comparison to the industry average to judge how
well a company is performing in this area. It is of use to those organizations that
have a large investment in inventory, to judge whether this investment is changing
in comparison to sales.

This ratio should be compared against industry averages. A low turnover implies
poor sales and, therefore, excess inventory. A high ratio implies either strong sales
or ineffective buying.
High inventory levels are unhealthy because they represent an investment with a
rate of return of zero. It also opens the company up to trouble should prices begin
to fall.

Average Stock / Cost of Sale x 365

= (84000/5668800) x 365
= 5.41 days

Profitability Ratio Definition

A profitability ratio is a measure of profitability, which is a way to measure a
company's performance. Profitability is simply the capacity to make a profit, and a
profit is what is left over from income earned after you have deducted all costs and
expenses related to earning the income. The formulas you are about to learn can be
used to judge a company's performance and to compare its performance against
other similarly-situated companies.
Common profitability ratios used in analyzing a company's performance
include gross profit margin (GPM), operating margin (OM), return on assets
(ROA), return on equity (ROE), return on sales (ROS) and return on investment
(ROI). Let's take a look at these in some detail.

Gross Profit Margin

The gross profit margin looks at cost of goods sold as a percentage of sales. This
ratio looks at how well a company controls the cost of its inventory and the
manufacturing of its products and subsequently pass on the costs to its customers.
The larger the gross profit margin, the better for the company.
Gross Profit / Net Sales x 100

= (2815200/8484000) x 100
= 33.18

Operating Profit Margin

Operating profit is also known as EBIT and is found on the company's income
statement. EBIT is earnings before interest and taxes. The operating profit margin
looks at EBIT as a percentage of sales. The operating profit margin ratio is a
measure of overall operating efficiency, incorporating all of the expenses of
ordinary, daily business activity.
Operating Profit / Net Sales x 100
= (2028000/8484000) x 100
= 23.90

Solvency Ratios
Solvency ratios, also called leverage ratios, measure a company's ability to sustain
operations indefinitely by comparing debt levels with equity, assets, and earnings.
In other words, solvency ratios identify going concern issues and a firm's ability to
pay its bills in the long term. Many people confuse solvency ratios with liquidity
ratios. Although they both measure the ability of a company to pay off its
obligations, solvency ratios focus more on the long-term sustainability of a
company instead of the current liability payments.

Return on Assets Ratio - ROA

The return on assets ratio, often called the return on total assets, is a profitability
ratio that measures the net income produced by total assets during a period by

comparing net income to the average total assets. In other words, the return on
assets ratio or ROA measures how efficiently a company can manage its assets to
produce profits during a period.

ROA =

Annual Net Income

Average Total Assets

= (1568800/2688480) x 100
= 58.35

Equity Ratio
The equity ratio refers to a financial ratio indicative of the relative proportion of
equity applied to finance the assets of a company. This ratio equity ratio is a variant
of the debt-to-equity-ratio and is also, sometimes, referred as net worth to total
assets ratio. The equity ratio communicates the shareholders funds to total assets
in addition to indicating the long-term or prospective solvency position of the
business.
Equity Ratio = Shareholders funds / Total assets
= 1593280/2688480
= 0.59

COST DATA
(A) Cost Per Unit
Material

2.5

Labor

.6

Electricity

.05

Rent

.1

Package

1.0

Production cost per unit

4.25

Less Administration overhead per unit:

Marketing

(0.41)

Manager

(0.14)

Accountant

(0.11)

Phone Bill

(0.01)

Cost Per Unit

(B)

3.58

Selling Price = 7 per unit

MARGINAL COSTING
Here the company is need to increase the production capacity
because of to export to Dubai, so the company need produce
more 84000 extra,

Sale
Cost of sale
Direct material
Direct labor
Electricity
Packaging
cover

84000*7
2.5*84000
.6*84000
.05*84000
1*84000

588000
210000
50400
4200
84000

(348600)

Profit

239400

(6) COST REDUCTION AND COST CONTROL

Cost reduction is to be understood as the achievement of real and permanent
reductions in the unit cost of the goods manufactured or services rendered without
Impassing their suitability for the use that is intended- ICWA London.
'COST CONTROL'
The practice of managing and/or reducing business expenses. Cost controls starts
by the businesses identifying what their costs are and evaluate whether those costs
are reasonable and affordable. Then, if necessary, they can look for ways to cut
costs through methods such as cutting back, moving to a less expensive plan or
changing service providers. The cost-control process seeks to manage expenses
ranging from phone, internet and utility bills to employee payroll and outside
professional services.
Cost control by management means a search for better and more economical ways
of completing each operation. Cost control is simply the prevention of waste within
the existing environment. This environment is made up of agreed operating
methods for which standards have been developed
Cost control and reduction refers to the efforts business managers make to monitor,
evaluate, and trim expenditures. These efforts might be part of a formal, companywide program or might be informal in nature and limited to a single individual or
department. In either case, however, cost control is a particularly important area of
focus for small businesses, which often have limited amounts of time and money.
In a small business the focus is often on selling and servicing the customer. This

leaves the task of purchasing slightly sidetracked. Even seemingly insignificant

expendituresfor items like office supplies, telephone bills, or overnight delivery
servicescan add up for small businesses. On the plus side, these minor
expenditures can often provide sources of cost savings.

Aspects of Cost Control:

Cost control involves the following steps and covers various aspects of
management. It has to be brought in the following manner:

(i) Planning:
Initially a plan or set of targets is established in the form of budgets, standards or
estimates.

(ii) Communication:
The next step is to communicate the plan to those whose responsibility is to
implement the plan.

(iii) Motivation:
After the plan is put into action, evaluation of the performance starts. Costs are
ascertained and information about achievements is collected and reputed. The fact
that the costs are being reported for evaluating performance acts as a prompting
force.

(iv) Appraisal:
Comparison has to be made with the predetermined targets and actual performance.
Deficiencies are noted and discussion is started to overcome deficiencies.

(v) Decision-making:
Finally, the reported variances are received. Corrective actions and remedial
measures are taken or the set of targets is revised, depending upon the
administrations understanding of the problem.

The management and control of the resources used in most commercial

organizations leaves a great deal to be desired. Waste is growing at such an
enormous rate that it has spawned a new industry for recycling and extracting
useful materials.
Materials are wasted in a number of ways such as effluents, breakage,
contamination, inefficient storage, poor workmanship, low quality, pilfering and
obsolescence. All these contribute to significantly increased material costs and all
can be controlled by efficient working methods and effective control.

Tools of Cost Control

Control has a regulatory effect. For better performance and better results certain
means of control have been evolved. These are called control techniques.
Mainly two types of standards are established to control costs:
(i) External
(ii) Internal
External standards are applied for comparing performance with other
organizations. The external standards are used for comparing the cost performance
with the other firm take the shape of a set of cost ratios.
Internal standards, on the other hand, are used for the evaluation of intra firm cost
elements like materials, labor, etc.
The internal standards used for cost control are:
(i) Budgetary control
(ii) Standard costing

(i) Budgetary Control:

Budgetary control is derived from the concept and use of budgets. A budget is an
anticipated financial statement of revenue and expenses for a specified period.
Budgeting refers to the formulation of plan for given period in numerical terms.

Thus budgetary control is a system which uses budgets as a means for planning
and controlling entire aspects of organizational activities or parts thereof.
According to Floyd H. Rowland and William. H. Barr, Budgetary control is a tool
of management used to plan, carry out and control the operation of business. As a
further explanation, it establishes predetermined objectives and provides the basis
for measuring performance against these objectives.
George R. Terry has defined budgetary control as a process of comparing the
actual results with the corresponding budget data in order to approve
accomplishments or to remedy differences by either adjusting the budget estimates
or correcting the cause of difference.

(ii) Standard Costing:

Standard costing is one of the prominently used systems of cost control. It aims at
establishing standards of performance and target costs which are to be achieved
under a given set up working conditions. It is a pre-determined cost which
determines what each product or service should cost under certain situation.
Standard costing is defined as the preparation and use of standard costs, their
comparison with actual costs and the measurement and analysis of variances to
their causes and points of incidence. Standard costs should be obtained under
efficient operations.
It starts with an estimate of what a product should cost during a future period given
reasonable efficiency Standard costs are established by bringing together
information collected from various sources within the company.
The degree of success is measured by a comparison of actual performance and
standard performance. For example, if the standard material input for a unit of
production is Rs. 500 and the actual cost is Rs 475 then the variance of Rs. (-) 25 is
the measure of performance, which shows that the actual performance is an
improvement over the standard.
This comparison of actual costs with standard cost will help in fixing responsibility
for nonstandard performance and will focus attention on areas in which cost
improvement should be sought by showing the source of loss and inefficiency.

(iii)Ratio analysis
Def:- A Ratio: is defined as an arithmetical/quantitative/numerical relationship
between two numbers. Ratio analysis is a very important and age old technique of
financial analysis.
A tool used by individuals to conduct a quantitative analysis of information in a
company's financial statements.

(iiii)Variance analysis
Def:-Variance is defined as the difference between the expected amount and the
actual amount of costs or revenues.
Variance analysis is the investigation of the difference between actual and planned
behavior. For example, if you budget, for sales to be Rs.10,000/- and actual sales
are Rs.8,000/-, variance analysis yields a difference of Rs.2,000/-.
Application

Tools and Techniques of Cost Reduction

1. Value Analysis.
Value chain analysis is a means of achieving higher customer satisfaction and
managing costs more effectively. The value chain is the linked set of value creating
activities all the way from basic raw materials' sources, component suppliers, to the
ultimate end-use product or service delivered to the customer.

2. Just in Time approach.

The main aim of JIT is to produce the required items, at the required quality and
quantity, at the precise time they are required. JIT purchasing requires for the items
where too much carrying costs associated with holding high inventory levels.

Purchasing system reduces the investment in inventories because of frequent order

of small quantities

3. Standard costing.
Standard costing is the practice of substituting an expected cost for an actual
cost in the accounting records, and then periodically recording variances that are
the difference between the expected and actual costs. This approach represents a
simplified
alternative
to
cost
layering
systems,
such
as
the FIFO and LIFO methods, where large amounts of historical cost information
must be maintained for items held in stock

4. Total Quality Control.

Under the TQM approach, all business functions are involved in a process of
continuous quality improvement.

5. Economic Order Quantity.

The Economic Order Quantity (EOQ) is the number of units that a company should
add to inventory with each order to minimize the total costs of inventorysuch as
holding costs, order costs, and shortage costs. The EOQ is used as part of a
continuous review inventory system in which the level of inventory is monitored at
all times and a fixed quantity is ordered each time the inventory level reaches a
specific reorder point.

6. Benchmarking
Benchmarking involves looking outward (outside a particular business,
organization, industry, region or country) to examine how others achieve their
performance levels and to understand the processes they use. In this way
benchmarking helps explain the processes behind excellent performance. When the
lessons learnt from a benchmarking exercise are applied appropriately, they
facilitate improved performance in critical functions within an organization or in
key areas of the business environment.

7. Inventory Management and Control.

The most important objective or inventory control is to determine and maintain an

optimum level of investment in the inventory. Most companies have now
successfully installed one or the other system of inventory planning and control.
The inventory control models range from very simple methods to highly
sophisticated mathematical inventory models

ABC Costing
Activity based costing (ABC) assigns manufacturing overhead costs to products in
a more logical manner than the traditional approach of simply allocating costs on
the basis of machine hours. Activity based costing first assigns costs to the
activities that are the real cause of the overhead. It then assigns the cost of those
activities only to the products that are actually demanding the activities
The cost accountant of HI-LUX Manufacturing attended a workshop on activitybased costing and was impressed by the results. After consulting with the
production personnel, he prepared the following information on cost drivers and
the estimated volume for each driver.
Activity

Cost driver

Machining

Cost driver volume

Ace

Setup

Number of setups

Machining

Machine hours

125

Best

Total
Champ

75

50

250

2,500

1,500

2,000

6,000

25,000

15,000

5,000

45,000

50

25

Assembly
Assembly

Direct labor hours

Inspection

Number of inspections

25

100

The cost accountant also determined how much overhead costs were incurred in
each of the four activities as follows:
Activity

Overhead costs

Machining
Setup
Machining

Total Machining department overhead

$150,000
750,000

$900,000

Assembly
Assembly

$360,000

Inspection

90,000

Total Assembly department overhead

Total overhead costs

$450,000
$1,350,00

FORCASTING TECHNIQUES

Financial Forecasting Methods

Financial forecasting methods are used to predict the success of a

company in the coming year. This method of forecasting is not only

used for planning and budgeting, but may be a tool for outsiders to use
when determining whether to invest in a company. Financial
forecasting can also be used when determining predictions for currency
markets of other countries. These methods can be used independently
or together to give a more accurate prediction
Time-Series Forecasting
Time-series forecasting is a quantitative forecasting technique. It measures data
gathered over time to identify trends. The data may be taken over any interval:
hourly; daily; weekly; monthly; yearly; or longer. Trend, cyclical, seasonal and
irregular components make up the time series. The trend component refers to the
data's gradual shifting over time. It is often shown as an upward- or downwardsloping line to represent increasing or decreasing trends, respectively. Cyclical
components lie above or below the trend line and repeat for a year or longer. The
business cycle illustrates a cyclical component. Seasonal components are similar to
cyclical in their repetitive nature, but they occur in one-year periods. The annual
increase in gas prices during the summer driving season and the corresponding
decrease during the winter months is an example of a seasonal event. Irregular
components happen randomly and cannot be predicted.

Budget Expense Method

The budget expense method bases its amounts for sales and company
costs on the expected growth in the future. This method is not as
dependable because it does require those within the company to make
judgements without the basis of history. Typically, when the Proforma
Financial Statements method is used, the budget expense method is
used in conjunction with Proforma. These two forecasting methods
were not created or meant to be used independent of each other. Using
both methods together is called the Combination Method.
Financial forecasting can be difficult for businesses when based upon
judgements or subjective opinions. However, using different
forecasting methods with each other can yield results that are more

substantial and accurate. Financial forecasting can assist companies

and investors when first starting out or attempting to predict the
success of fiscal performance in the coming year. In any case, financial
forecasting aids those who are making decisions of investment.

Proforma Financial Statements

Proforma Financial Statements is a forecasting method that uses sales
figures and costs from the previous two to three years. This method of
forecasting is typically used in situations such as mergers
and acquisitions. It provides a good basis of the financialstatements of
a company while eliminating certain costs that are not reoccurring or
not typical for the organization or company. The Proforma
Financial Statements are also used in cases where a new company is
forming and statements are needed to request capital from investors.
Causal Model Method
The causal model is so called because it employs the cause-effect
relationship between fertilizer demand and the factors affecting it. The
model does not depict fertilizer demand over time or for a particular
point of time but presents demand in relation to a set of
circumstances. While the trend extension method assumes that time
reflects all factors, the causal method (also called the regression
method) seeks to establish direct relationships between fertilizer
demand and factors influencing it. Factors affecting demand, as we
have seen earlier, include crop prices, fertilizer prices, credit
availability, irrigated area, rainfall, area under high-yielding varieties,
crop pattern and distribution arrangements. By analysing past data,
two or three critical factors that have the most profound effect can be
selected and the effect of the selected factors quantified and expressed
in the form of mathematical equations. To project demand for future
years, the likely state of each selected critical factor at that point of
time has to be first assessed.

BUGETING
Sales Budget for
Sales budget
Sales unit
Selling price
Total

1212000*
7
8484000

Production Unit
1212000+12000 = 1224000
Production Budget
Material
Labor
Electricity
Rent
Packing cover
Total

1224000*
1224000*
1224000*
1224000*
1224000*

2.5
0.6
0.05
0.1
1
=

3060000
734400
61200
122400
1224000
5202000

Purchase budget
A purchases budget contains the amount of inventory that a company must
purchase during each budget period.
Material for products +closing stock-opening stock
1212000+12000 -0= 1224000
Material price =
Material (A) salt = 2.5 (per unit)
Material (A) 1224000*2.5= 3060000

material (B) pack = 1(per unit)

Material (B) 1224000*1=1224000

Budgeted material purchase (rupee) = 4284000

Labor Budget
Units

of

1224000

production
Number of direct

labor
Total Labor wage

0.6

1224000* 0.6

per unit
Total direct labor

734400

cost
Expense budget

Particulars
Marketing
Manager
Accountant
Phone bill
Rent
Total expenses

499200
156000
120000
12000
122400
909600

Cash Budget
ITEM

Q1

Q2

Q3

Q4

Beginning cash balance

1000000

1272700

1560400

1838100

cash sales (301000*7)

2121000

2121000

2121000

2121000

10000
00
84840
00

total cash collected

3121000

3393700

3681400

3959100

Payment:
Row material
Payroll
Packing Cover
DIRECT EXPENCES

1071000
377400
306000

1071000
377400
306000

1071000
377400
306000

1071000
377400
306000

45000
48900

30000
48900

40000
48900

50000
48900

Total cash expenses

1848300

1833300

1843300

1853300

Cash surplus

1272700

1560400

1838100

2105800

Advertising
Administration expenses

2015

BALANCE SHEET FOR THE YEAR

R
S

Fixed Asset:
Land
Building and Equipment

RS

RS
298680
200000
498680

Current asset:
Raw material Stock

84000

94840
00

73782
00
21058
00

Cash
Total Asset
EQUITY:
3000 ORDINARY SHARE OF rs.100
EACH
RETAINED EARNINGS
PREFERANCE SHARE 12%
TOTAL EQUITY:
NON CURRENT LIABILTY:
DEBENTURE 10% OF 400000
LOAN 12% OF 200000
CURRENT LIABILTY:
CREDITORS
TAX PAYABLE 20%
TOTAL EQUITY AND LIABILITY

2105800

2189800
2688480

300000
893280
400000
1593280
400000
200000
100000
395200

600000

495200
2688480

Cost of Capital
Cost of capital refers to the opportunity cost of making a specific investment. It is
the rate of return that could have been earned by putting the same money into a
different investment with equal risk. Thus, the cost of capital is the rate of return
required to persuade the investor to make a given investment
Cost of Equity

The cost of equity is the return that stockholders require for their investment in a
company. A firm's cost of equity represents the compensation that the market
demands in exchange for owning the asset and bearing the risk of ownership.

1. Earnings per share/ market price per share

= (627520+893280)/3000
= 2.53
Cost of Debt
The effective rate that a company pays on its current debt. This can be measured in
either before- or after-tax returns; however, because interest expense is deductible,
the after-tax cost is seen most often. This is one part of the company's capital
structure, which also includes the cost of equity.

COST OF DEBT

2. Loan interest (1-tax)/capital*100

= 24000* 0.8/200000* 100
= 9.6

3. Debenture Interest (1- Tax)/capital*100

= 40000*0.8/400000*100
=8
4. Preference interest- tax/preference*100

= 48000*0.8/400000*100
= 9.6

Investment Appraisal
Capital
Equity
(KD) Loan
(KD)
Debenture
Preference
share
Total

Amou Cost Of
Weig
nt
Capital
ht
WACC
30000
0
2.53
0.23
0.58
20000
0
9.6
0.15
1.48
40000
0
8
0.31
2.46
40000
0
9.6
0.31
2.95
13000
00
29.73
7.48

The company planning to invest two project in different place. So after analyzing this the
compony need to find out where is better to invest
Company has estimated the expected cash flows for two possible projects as follows

Project

Year
0

(150)

40

50

60

70

100

(1,000)

500

400

300

200

100

Year

Net Present Value

9%

10%

0.917

0.909

0.842

0.826

0.772

0.751

0.708

0.683

0.650

0.621

Pay Back Period

Payback period is the time in which the initial cash outflow of an investment is
expected to be recovered from the cash inflows generated by the investment. It is
one of the simplest investment appraisal techniques.
The payback period formula is used to determine the length of time it will take to
recoup the initial amount invested on a project or investment. The payback period
formula is used for quick calculations and is generally not considered an end-all for
evaluating whether to invest in a particular situation.

The formula to calculate payback period of a project depends on whether the cash
flow per period from the project is even or uneven. In case they are even, the
formula to calculate payback period is
Payback Period =

Initial Investment Cash

Inflow per Period

Payback Period of Project 1

The 150,000 initial outlay is returned
(40,000 + 50,000 + 60,000) = 3 years

Payback Period of Project 2

The 1,000,000 initial outlay is returned as follows:
(500,000 + 400,000 + 1/3[300,000]) = 2.3 year

So the ranking is

1st: Project 2
2nd: Project 1
project 1st payback period is more than the project 2 nd payback period so based on
the payback period better to select the 2nd project

Net Present Value

Determining the value of a project is challenging because there are different ways
to measure the value of future cash flows. Because of the time value of money, a
dollar earned in the future wont be worth as much as one earned today. The
discount rate in the NPV formula is a way to account for this. Companies have
different ways of identifying the discount rate, although a common method is using
the expected return of other investment choices with a similar level of risk.
The net present value approach is the most intuitive and accurate valuation
approach to capital budgeting problems. Discounting the after-tax cash flows by
the weighted average cost of capital allows managers to determine whether a
project will be profitable or not

Net Present Value of Project 1 (9%)

Year

Cash Flow

Factor

000

NPV
000

(150)

(150.00)

40

0.917

36.68

50

0.842

42.1

60

0.772

46.32

70

0.708

49.56

100

0.650

65
89.66

Net Present Value of Project 2

Year

Cash Flow

(9%)
Factor

000
0

(1000)

500

NPV
000

1
0.917

(1000.00)
458.5

400

0.842

336.8

300

0.772

231.6

200

0.708

141.6

100

0.650

65
1233.5

Net present value of the project one is greater than the project two so on the basisi
of npv here the company prefer to select the project two.

Internal Rate of Return

The IRR can be defined as the discount rate which, when applied to the cash flows
of a project, produces a net present value (NPV) of nil. This discount rate can then
be thought of as the forecast return for the project. If the IRR is greater than a
preset percentage target, the project is accepted. If the IRR is less than the target,
the
project
is
rejected.
Considering the definition leads us to the calculation. The IRR uses cash flows (not
profits) and more specifically, relevant cash flows for a project. To perform the
calculation, we need to take the cash flows of a project and calculate the discount
factor that would produce a NPV of zero

Internal Rate of Return PROJECT 1

NPV @24%
Year

Cash Flow

Factor

000

NPV
000

(150)

(150.00)

40

0.787

31.48

50

0.620

31

60

0.488

29.28

70

0.384

26.88

100

0.303

30.3
-1.06

Internal Rate of Return PROJECT 2

NPV 21%.
Year

Cash Flow

Factor

000

NPV
000

(1000)

(1000.00)

500

0.826

413

400

0.683

273.2

300

0.564

169.2

200

0.466

93.2

100

0.385

38.5
-12.9

PROJECT 1
NPV 18%:
Year

Cash Flow

Factor

000

NPV
000

(150)

(150.00)

40

0.847

33.88

50

0.718

35.9

60

0.608

36.48

70

0.515

36.08

100

0.437

43.7

36.04

PROJECT 2
NPV 18%:
Year

Cash Flow

Factor

000

NPV
000

(1000)

(1000.00)

500

0.847

423.5

400

0.718

287.2

300

0.608

182.4

200

0.515

103

100

0.437

43.7
39.8

To determine the internal rate of return for each project we can apply the formula

X+

a/a+ x(Y-X)

X = the lower rate of interest used

Y = the higher rate of interest used
a = the difference between the present values of the outflow and the
Inflows at X%
b = the difference between the present values of the outflow and the Inflows at Y
%.

PROJECT 1 IRR:
18% = 36040
6/37100 * 36040 = 5.82
24% = -1060
PROJECT 2 IRR:
18% = 39800
3/ 52700*39800 = 2.26
21% = -12900
While analyzing the IRR project one is greater than the project two so based on the
IRR project one is acceptable

Profitability index
Profitability index is an investment appraisal technique calculated by dividing the
present value of future cash flows of a project by the initial investment required for
the project.
Looking at the situation of divisible, independent projects we
would need to consider the highest profitability index. Here the highest
profitability index is project one. It is greater than the project two.

Project
P/V-Inflows
Initial investment
=

239.66

1233.5

150

1000

1.59

1.24

References:
accountingexplained.com/managerial/capital-budgeting/payback-period

http://www.financeformulas.net/Payback_Period.html
http://www.investopedia.com/walkthrough/corporate-finance/4/npv-irr/net-presentvalue.aspx
http://accountingexplained.com/managerial/capital-budgeting/profitability-index