Payback B.E.P. Profitability index 4 years 45% 1.76 6 years 30% 1.35 Relative Ranking of Project X and Project Y Particular's Rank Project X IRR Rate of Return Pay back Profitability index NVP @ 12% NVP @ 18% B.E.P. Cost of Capital 11 1 1 II Equal 11 Project Y 11 1 II 11 1 Equal II Analysis: The major criterion i.e., IRR, Pay back and Profitability Index in which Project X is ranking first and hence it could be selected. Illustration 5: A company is contemplating to purchase a machine. Two machine A and B are available, each costing Rs. 5 lakhs. In comparing the profitability of the machines, a discounting rate of 10% is to be used and machine is to be written off in five years by straight-line method of depreciation with nil residual value. Cash inflows after tax are expected as follows: 35 Year 1 2 3 4 5 Machine A 1.5 2.0 2.5 1.5 1.0 (Rs.in lakhs) Machine B 0.5 1.5 2.0 3.0 2.0 Indicate which machine would be profitable using the following methods of ranking investment proposals: (0) Pay back method : (ii) Net present value method; (iii) Profitability index method; and (iv) Average rate of return method. The discounting factors at 10% are- Year Discount factors 1 2 3 4 .909.826 .751.683 5 .621