Solve the problem given in Example 5.1 by E.R.R.R. method.

Question

Accepted Answer

Step 1: The cash flow diagram for the given problem is shown in Fig. 5.1.
Step 2: From the cash flow diagram shown in Fig. 5.1, it is clear that the equivalent annual receipts, R = ₹2,00,000; the equivalent annual expenses, E = 0; the initial investment, P = ₹5,00,000; salvage value, S = ₹1,00,000; n = 5 and [latex]e\% = M.A.R.R. = 15\%[/latex]. Thus,

[latex]E.R.R.R.=\frac{\left(₹2,00,000-₹0\right)-\left(₹5,00,000-₹1,00,000\right)\left(A/F,15\%,5 \right) }{₹5,00,000}[/latex]

[latex]=\frac{\left(₹2,00,000\right)-\left(₹4,00,000\right)\left(0.1483\right) }{₹5,00,000}[/latex]

[latex]= 0.28136 = 28.14\%[/latex]

Step 3: Since [latex]E.R.R.R. \gt M.A.R.R.[/latex], the investment in the project is economically justified.

Question 5.11: Solve the problem given in Example 5.1 by E.R.R.R. method.

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