Lambini Transportation (Pvt.) Ltd. is considering to run micro bus service from Butwal to Pokhara. A deluxe bus costs Rs. 2,000,000 and it will run…
BBS Fundamentals of Financial Management · 2078 · Solved Question with Answer
Lambini Transportation (Pvt.) Ltd. is considering to run micro bus service from Butwal to Pokhara. A deluxe bus costs Rs. 2,000,000 and it will run the bus service for 5 years to come. Annual net cash inflows for five years will be as follows:
| Year | 1 | 2 | 3 | 4 | 5 |
| Cash Flows Rs. | 600,000 | 800,000 | 800,000 | 600,000 | 500,000 |
a. What is the payback period of the project? Should Lumbini Transportation (Pvt) Ltd. run the bus service from Butwal to Pokhara if its maximum cost recovery period is 3 years?
b. If the required rate of return of the project is 10 percent, what is the NPV of the project? Should Lumbini Transportation (Pvt) Ltd. run the bus service?
c. Calculate internal rate of return (IRR) of each project. Should the company run the bus service?
d. Which method of evaluating the project is superior? Why?