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
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