Capital Budgeting Techniques

M&T Textiles Limited is a well-established name in the spinning and wavering section of the industry. Considering the growth in textile industry, the management is planning to start operations in the printing of the fabric. It is estimated that it will be a 5-year project to start the new product line. The company has been offered two projects for the start of the new product line. Before the start of new product line, the projects need to be assessed on the basis of capital budgeting techniques so that the feasibility can be judged. Following are the details of the two projects:

	Project 1	Project 2
Initial Investment	Rs. 3,500,000	Rs. 3,500,000
Cash inflow in year 1	Rs. 1,200,000	Rs. 1,500,000
Cash inflow in year 2	Rs. 900,000	Rs. 800,000
Cash inflow in year 3	Rs. 800,000	Rs. 1,200,000
Cash inflow in year 4	Rs. 800,000	Rs. 600,000
Cash inflow in year 5	Rs. 1,200,000	Rs. 450,000

Required:

Suppose the required rate of return is 12%. You are required to apply following capital budgeting techniques to identify which project will be acceptable and why (Consider the projects are mutually exclusive)?

1. Calculate Net Present Value (NPV) of both projects. Based on results of NPV, which project will be acceptable and why?
2. Calculate Profitability Index (PI) of both projects. Based on results of PI, which project will be acceptable and why?

NOTE: Formula and complete working is mandatory in each part, provide complete calculations in order to avoid marks deduction.