Interpret the following outcomes of economic analysis of irrigation project.

(Final 2061)
a. Net present value = Rs.15000
b. Benefit cost ratio = 1.4
c. Internal rate of return = 25%
Decision rule for a single project
1. B/C ratio rule
B/C less than one reject
B/c greater than on accept
B/C equals to one indifference

2. NPV rule
NPV negative = reject
NPV positive = Accept
NPV zero = Indifference

3. IRR rule
IRR greater than RRR = Accept
IRR lesser than RRR= Reject
IRR equals to RRR = Indifference

In this project B/C ratio is greater than one, NPV is positive and IRR is greater than RRR ( let 16%)
hence such irrigation project is feasible.

Interpretation

B/ C ratio = 1.4 means return is positive. It signifies that if you spend one rupee you get return of 1.4
rupee in present value after project accomplishment. Or present value of benefit is 1.4 times greater than
present value of cost.

NPV = Rs. 15000 means return is positive. It also means investment adds wealth of amount Rs. 15000 in
present value in investors property. Or present value of benefit is more than present value of cost by
amount Rs.15000.

IRR 25% means the investment generates return of 25% per year throughout the project period. Or a
investor can pay maximum interest rate of 25% for investment.