Dr.B.

Janakiram

The project requires an initial investment of Rs.20000. and the annual cash flows for 5 years is Rs.6000, Rs.8000, Rs.5000, Rs.4000 and Rs.4000 respectively. Find the pay back period

Year 1 2 3

Cash inflow 6000 8000 5000

Cumulative cash flow 6000 14000 19000

4
5

4000
4000

23000
27000

 Pay

back period = 3 years + 1000 / 4000 = 3.25 years

Selection / rejection rule.

NPV > Zero . Accept NPV < Zero . Reject NPV = Zero .. consider

A choice is to be made between two competing projects which require an equal initial investment of Rs.50,000 and are expected to generate net cash flows as under:
Year 1 2 3 Project A Rs. 25000 15000 10000 Project B Rs. 10000 12000 18000

4 5
6

Nil 12000
6000

25000 8000
4000

Cost of capital for the company is 10%

Year

P V Factor @ 10%

Project A Cash inflow Present value 25000

15000 10000 Nil 12000 6000

Project B Cash inflow Present value 10000

12000 18000 25000 8000 4000 50000 6819 Accept

1
2 3 4 5 6

0.909
0.826 0.751 0.683 0.621 0.564

22725
12390 7510 Nil 7452 3384 53461 50000 3461

9090
9912 13518 17075 4968 2256 56819

Total Present value Less initial investment NPV

A choice is to be made between two competing projects which require an equal initial investment of Rs.4, 00, 000 and are expected to generate net cash flows as under:

Year 1 2 3 4 5

Cash flow of project X 40000 120000 160000 240000 160000

Cash flow of project Y 120000 160000 200000 120000 80000

Cost of capital for the company is 10%. Which project you will prefer

 No

project is acceptable unless the yield is 10 percent. Cash inflows and cash outflows of a certain project is given below:
Year
Cash outflow Cash inflow

150000 30000

20000

30000

60000

80000

30000

Calculate

NPV

 The

initial cash outlay of a project is 50000 and it generates cash inflows of Rs.10000, Rs.20000 , Rs.30,000 and Rs.10000 over 4 years. Assume 10% rate of interest. Find Profitability index.

 Profitability

index = PV of cash inflows / initial cash outlay

Year

Cash inflow P V Factor

Present value of cash inflow

1
2 3 4

10000
20000 30000 40000

0.909
0.826 0.751 0.683 Total

9090
16520 22530 6830 54970

= 54970 / 50000 =

1.0994

 The

initial cash outlay of a project is Rs.1,00,000 and it generates cash inflows of Rs.40000, Rs.30000, Rs.50000 and Rs.20000. Assume 10% rate of discount. Calculate profitability index. What does it signify?

Year 1 2 3 4

Cash inflows 40000 30000 50000 20000

P V Factor at 10% 0.909 0.826 0.751 0.683

Present values 36360 24780 37550 13660

Profitability index = P V cash inflows Initial investment = 112350 100000 = 1.12

It indicates that for every one rupee of investment, there is 0.12 profit.