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Q1

Year 0 1 2 3 4 5
Casfhlows (50,000) 15,000 15,000 20,000 10,000 5,000

Cost of Capital is 8%

Calculate NPV and IRR

NPV -50,000 13,888.89 12,860.08 15,876.64 7,350.30 3,402.92

NPV 3,378.83

IRR (50,000.00) 13,513.51 12,174.34 14,623.83 6,587.31 2,967.26

NPV (133.76)

IRR NPV
10% 994.1
11% -133.76

Answer: IRR lies between 10% and 11%


Years 0 1 2
Cashflows (150,000) 100,000 120,000

IRR (150,000) 77,519.38 72111.05102

NPV (369.57)

IRR NPV
28% 1376.19
29% -369.57

IRR lies between 28% and 29%


Proftitability Index

if PI is more than 1 then NPV is positive and project is accepted

If PI is less than 1 then NPV is negative and project is NOT accepted

Higher the PI the better it is

Q7

PI PV of furture cash flow/initial investment

PV of furture cash flow of perpetual secrity = cashflow/i

Perpetual security is a security which will give fixed return per year foreever and is benchmarked against a macroeconomic ind

Initial Investment 20,000


Cashflow 2,000 per year
i 8%

PV 25,000

PI 1.25

Since PI is 1.25, we know that NPV of the project will be positive and therefore, investment can be made in the project

Q8

Year 0 1 2 3 4 5 6 7
Cashflow -375 115 115 115 115 115 115 165

PV 104.55 95.04 86.40 78.55 71.41 64.91 84.67


PV 585.53

PI 1.56

Since PI is 1.56 and above 1, it means that NPV will be positive and investment can be made in the project.
Regular security PV = Cashflow/(1+i)^n

gainst a macroeconomic indictaor like GDP, Inflation or IR.

made in the project


conventional cashflows - NPV and IRR give similar results fro individual projects

When IRR and NPV can give differing results

1. When cashflow pattern differs


2. when scale of projects are different
3. when there are multiple IRRs in a project