Project Selection question

Submitted by raza82 on Wed, 01/30/2013 - 15:54

Based on yuor market analysis you have obtained the following info:

Delhi - IRR (45%), payback period (1.5 yrs)

Mumbai - IRR (32%), payback period (1.1 yrs)

Chennai - IRR ( 36%) , payback period (0.75 yrs)

Based on this data, which area is best to estabish your company?

a) Chennai, since the payback period is the shortest.

b) Mumbai, since the IRR is the lowest

c) Delhi, since the IRR is the highest.

d) Delhi, since the pay back period is the longest

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sspawar

Thu, 01/31/2013 - 01:18

IMO

Q IS NOT ANSWERABLE.

raza82

Thu, 01/31/2013 - 12:31

 Explaination:

 

Payback period is not very precise since it does not consider the time value of money.

On the other hand, IRR is the discount rate when the Present Value  of the cash inflows equals the original investment. Generally projects with higher IRR are considered better investment than projects with lower IRR

 

 

Can somebody explain me the strategy to approach  for Project Sleection and where I can learn more about it

steelproject2012

Fri, 02/01/2013 - 09:27

I'll rather go for C for the same reason as explained by.... Does anyone hhave a more profound reason for his/her choice?

sspawar

Fri, 02/01/2013 - 16:27

Let us have an example.

I invest an amount of 100
In 1st case Pay back is 1.5 yrs and IRR 45% then in end of 2rd and half year I will get
145
In second case payback 0.75 yrs and IRR 36%
In 1.75 yrs I wil get 136 . Remaining 0.75 year will give benefit over 136 = 173
In other way in ist case in 0.75 year 122.50

It depends on investors will he go on longer term project or shorter term project.
That's why in earlier reply I said it is not answerable.