This document discusses various capital investment decision methods and their application to an energy audit project at a tea factory in Neluwa, Sri Lanka. It analyzes the project using the internal rate of return (IRR), profitability index (PI), and accounting rate of return (ARR) methods. The IRR is calculated as 15.8%, the PI is calculated as 1.248, and the ARR is calculated as 8.42%. Since all values are above their respective thresholds, the analysis finds the project to be acceptable under all three methods.

2. CAPITAL INVESTMENT
DECISION METHODS
•Non-discounted cash flow methods
1. Payback period
2. Accounting rate of return (ARR)
•Discounted cash flow methods
1. Internal rate of return (IRR)
2. Net present value (NPV)
3. Profitability Index (PI)
4. Discounted Payback period

3. Internal Rate of Return Method (IRR)
 The interest rate that results in the present values
of the cash outflows equaling the present value of
the cash inflows.
 In other words, Discount rate that makes
NPV = 0
Discounted cash flow methods

4. Profitability Index (PI)
Discounted cash flow methods
 This is a concept based on NPV
calculation
 If PI > 1, then investment is acceptable
 If PI < 1, then investment is unacceptable
 This is calculated to rank projects when
there is a capital limitation

5. Accounting Rate of Return Method
Non-discounted cash flow methods
Average profit
Average investment
Average profit = Total profit for the period
Number of years
 ARR =

6. •Conducted by - Industrial Services Bureau,
Kurunagala.
•Objective - improving the energy efficiency
and reducing the energy demand.
Energy audit project – Duliella Tea Factory
,Neluwa

7. Cash inflows and outflows
Energy audit project – Duliella Tea Factory
,Neluwa
Recommendations Y(0) Y(1) Y(2) Y(3) Y(4) Y(5) Y(6) Y(7) Y(8)
1. Introduce VSD controllers to troughs -1,200,000 313,000 313,000 313,000 313,000
2. Introduce 2 kW high efficient motors
(HEMs) for the process -2,100,000 440,000 440,000 440,000 440,000 440,000 440,000
3. Operate troughs at their maximum
carrying capacities 276,120 276,120 276,120
4. Replace the oversize motors with 5
kW high efficient motors -1,600,000 317,000 317,000 317,000 317,000 317,000 317,000
5. Introduce soft starters for the rollers
to minimize the sudden peaks during
batch operation.
-175,000 138,000 138,000 138,000
6. Introduce steam radiator system -1,000,000 318,600 318,600 318,600 318,600
7. Introduce7.5 kW high efficient (80%
or higher) motors (HEMs) for the
process -250,000 63,700 63,700 63,700 63,700 63,700
8.Introduce a multi fuel bio mass boiler
and along with a steam radiator system -6,000,000 1,500,000 1,500,000 1,500,000 1,500,000 1,500,000 1,500,000 1,500,000 1,500,000
-12,325,000 3,366,420 3,366,420 3,366,420 2,952,300 2,320,700 2,257,000 1,500,000 1,500,000

8. IRR - Calculation
Energy audit project – Duliella Tea Factory
,Neluwa
NPV vs. Discount rate
Discount rate NPV (LKR)
2 6802987.90
4 5467858.52
6 4275941.22
8 3207980.67
10 2247736.93
12 1381455.45
14 597439.36
16 -114297.40
18 -762312.49

9. IRR = 15.8%
-2,000,000.00
-1,000,000.00
0.00
1,000,000.00
2,000,000.00
3,000,000.00
4,000,000.00
5,000,000.00
6,000,000.00
7,000,000.00
8,000,000.00
0 2 4 6 8 10 12 14 16 18 20
NPV
Discount Rate
NPV vs Discount rate
(15.8, 0 )

10. Profitability Index (PI) Calculation
PV =
3,366,420
(1+0.0829)
+
3,366,420
(1+0.0829)2 +
3,366,420
(1+0.0829)3 +
2,952,300
(1+0.0829)4 +
2,320,720
(1+0.0829)5 +
2,257,000
(1+0.0829)6 +
1,500,000
(1+0.0829)7+
1,500,000
(1+0.0829)8
= Rs.15,387,418.69
PI =
15,387,418.69
12,325,000.00
= 1.248
 Cost of capital = 8.29%

11.  Average profit =
20,629,260−12,325,000
8
= Rs. 1,038,032
 ARR =
1,038,032 ×100%
12,325,000
= 8.42%
ARR Calculation

12. Decision making
method
Value acceptable/
unacceptable
Reasons
IRR 15.8% acceptable IRR > discount rate (8.29%)
PI 1.248 acceptable PI > 1
ARR 8.42% acceptable IRR > discount rate (8.29%)
Final Outcomes of cash flow