Name : Babar Adeeb

Reg# MM121037

1. Annual cash flows and NPV

(a): Infomercial Project
Year
Operating Cash flows
Sales(5000 x 10) (g=.05)
Variable cost (62% of sale)
Depreciation
Earning before tax
Tax
Earning after tax
Add back depreciation
Net Operating Cash Flows

Capital CFs
Video Equipment
Working Capital
Residual value net of tax
Net Cash Flows
PV Factor @ 10%
PV of CFs

-235000
1
-235000

NPV

-73436

50000
-31000
-45000
-26000
9100
-16900
45000
28100

52500
-32550
-72000
-52050
18218
-33832
72000
38168

55125
-34178
-42750
-21803
7631
-14172
42750
28578

57881
-35886
-27000
-5005
1752
-3253
27000
23747

60775
-37681
-24750
-1656
580
-1076
24750
23674

28100
0.909
25543

38168
0.826
31527

28578
0.751
21462

23747
0.683
16219

23674
0.621
14702

35000
-18550
-45000
-28550
9993
-18557
45000
26443

37450
-19849
-72000
-54399
19040
-35359
72000
36641

40072
-21238
-42750
-23916
8371
-15545
42750
27205

42877
-22725
-27000
-6848
2397
-4451
27000
22549

45878
-24315
-24750
-3187
1115
-2072
24750
22678

26443

36641

27205

22549

22678

-225000
-10000

(b): Training Video Project

Year
Operating Cash flows
Sales (875 x 5 x 8) (g=.07)
Variable Costs (53% of sales)
Depreciation
Earning before Tax
Tax
Earning after Tax
Add back Depreciation
Net operating cash flows
Capital Cash Flows
Video Equipment
Working Capital
Residual value net of tax
Net Cash Flows

-225000
-5000
-230000

PV Factor @ 10%
PV of Cash Flows

1
-230000

NPV

-76139

0.909
24037

0.826
30265

0.751
20431

0.683
15401

0.621
14083

85000
-49950
-45000
-9550
3343
-6207
45000
38793

89950
-52399
-72000
-34449
12057
-22392
72000
49608

95197
-55416
-42750
-2969
1039
-1930
42750
40820

100758
-58611
-27000
15147
-5301
9846
27000
36846

106653
-61996
-24750
19907
-6967
12940
24750
37690

38793
0.909
35263

49608
0.826
40976

40820
0.751
30656

36846
0.683
25166

37690
0.621
23405

(c): Combined Project

Year
Operating Cash flows
Sales (Infomercial + Training)
Variable Costs (Info + Training)
Depreciation
Earning before Tax
Tax
Earning after Tax
Add back Depreciation
Net operating cash flows
Capital Cash Flows
Video Equipment
Working Capital
Residual value net of tax
Net Cash Flows
PV Factor @ 10%
PV of Cash Flows
NPV

-225000
-15000
-240000
1
-240000
9563

2. No Project is acceptable according to discounted pay back period because all projects have more than fou

(a): 235,000 (28100+38168+28578+23747) = 116,407

(b): 230,000 (26443+36641+27205+22549) = 117,162
(c): 240,000 (38793+49609+40820+36846) = 73,932
3. Because all projects are rejected due to more than 4 years payback period. So there is no confusion of rou
4. In this case, there is no need to round off the payback period. But it can be used on the assumption that al
5. According to NPV technique project (a) and (b) are not acceptable because these have negative NPV but
6. We dont need to calculate the IRR of project (a) and (b) because these have negative NPV, so IRR of the
7. IRR is not accurate in evaluating the project because it has some limitations.
a) IRR does not meet the values avidity rule.
b) There may be multiple IRR in case of abnormal cash flows. So we can not understand that which IR
c) IRR suggest that re-investment should be on the project rate of return. But it is not possible that we a
8. NPV is superior. Payback period does not consider the time value of money and cash flows after the payb
9. When Training video project has greater uncertainty, then we should take different discount rate for the e
10. In this situation, NPV of all projects will be decrease due to higher discount rate but IRR of these projects

10

63814
-395645
-13500
10749
-3762
6987
13500
20487

67005
-41543

70355
-43620

73873
-45801

77566
-48091

25462
-8912
16550

26735
-9357
17378

28072
-9825
18247

29475
-10316
19159

16550

17378

18247

19159

20487
0.564
11555

16550
0.513
8490

17378
0.466
8098

18247
0.424
7737

10000
13000
42159
0.385
16231

10

49089
-26017
-13500
9572
-3350
6222
13500
19722

52526
-27839

56202
-29787

60137
-31872

64346
-34103

24687
-8640
16047

26415
-9245
17170

28265
-9893
18372

30243
-10585
19658

16047

17170

18372

19658

18372

5000
13000
37658

19722

16047

17170

0.564
11123

0.513
8232

0.466
8001

0.424
7790

0.385
14498

10

112903
-65582
-13500
33821
-11837
21984
13500
35484

119531
-69382

126557
-73407

134010
-77673

141912
-82194

50149
-17552
32597

53150
-18603
34547

56337
-19718
36619

59718
-20901
38817

32597

34547

36619

38817

36619
0.424
15526

15000
13000
66817
0.385
25725

35484
0.564
20013

32597
0.513
16722

34547
0.466
16111

l projects have more than four years payback period.

o there is no confusion of round off in this case.

sed on the assumption that all payment and receipt are continuous process. This assumption may be dangerous for company in m
hese have negative NPV but combined project has positive NPV, so it is acceptable. If project (a) and (b) are accepted then comp
negative NPV, so IRR of these projects will be below the WACC. But combined project has IRR more than WACC. So IRR als

not understand that which IRR is correct.

But it is not possible that we are able to get the project like previous one.
and cash flows after the payback period. IRR also has some limitations which are discussed above in 7 point. So we should cons
fferent discount rate for the evaluation of project of training videos. We should accept those projects which give positive NPV at
rate but IRR of these projects will not be change. IEI should accept those projects which have positive NPV or higher IRR than r

be dangerous for company in meeting its financial requirements because Cash flows receipts and payments are not a continuous
and (b) are accepted then company will suffer and loss and management objective to maximize the wealth of owners can not be
R more than WACC. So IRR also suggest that only project (c) should be accepted.

e in 7 point. So we should considered NPV when making decision about the investment in any project.
cts which give positive NPV at risk adjusted discount rate and have higher IRR.
sitive NPV or higher IRR than risk adjusted discount rate.

payments are not a continuous process.

he wealth of owners can not be met.