Monday, June 20, 2011

Calculate the NPV and IRR of each project.


A company is considering to select a project out of the two mutually exclusive projects. The company’s cost of capital is 10% and the net after tax cash flow of the project are as follows:

Year                              0                 1                 2                3                   4              5
Project   X (Rs.)    2,00,000                      35,000      80,000      90,000      75,000     20,000
Project Y (Rs.)      2,00,000     2,18,000    10,000     10,000         4,000       3,000
(i)                   Calculate the NPV and IRR of each project.
(ii)                 State with reasons which project you would recommend

The discount factors are as follows:
Year                              0        1             2             3             4              5
Discount factor
At 10%                         1        0.91       0.83      0.75      0.68         0.62
At 20%                         1        0.83       0.69      0.58      0.48         0.41

Ans:        (i)
                Net Present Value at 20%:
Year
Project X
Project Y
Net Cash income (Rs.)
Discount
Factor
PV
Rs.
Net Cash income (Rs.)
Discount
Factor
PV
Rs.
0
2,00,000
1
2,00,000
2,00,000
1
2,00,000
1
35,000
0.83
29050
2,15,000
0.83
1,78,450
2
80,000
0.69
55200
10,000
0.69
6,900
3
90,000
0.58
52200
10,000
0.58
5,800
4
75,000
0.48
36000
4000
0.48
1,920
5
20,000
0.41
8200
3,000
0.41
1,230



3,80,0650


3,94,300

Net Present Value at 10%:
Year
Project X
Project Y
Net Cash income (Rs.)
Discount
Factor
PV
Rs.
Net Cash income (Rs.)
Discount
Factor
PV
Rs.
0
2,00,000
1
2,00,000
2,00,000
1
2,00,000
1
35,000
0.91
31850
2,15,000
0.91
1,95,650
2
80,000
0.83
66,400
10,000
0.83
8300
3
90,000
0.75
67500
10,000
0.75
7500
4
75,000
0.68
51000
4000
0.68
2720
5
20,000
0.62
12400
3,000
0.62
1860



4,29,150


4,16,030
               
                Internal Rate of Return: IRR = LRD + NPR x R / PV
                LRD = Lower rate of discount
                NPVR = Net present value at lower rate of discount
                PV = Difference in present value of lower and higher
                R = Difference between two rates of discount

0 comments:

Post a Comment

Popular Posts

Text

updated till june 2011