lnvesLmenL CrlLerla

lnvesLmenL crlLerla
ulscounLlng CrlLerla
nonulscounLlng
CrlLerla
neL resenL
value
8eneflL
CosL
raLlo lnLernal 8aLe
of reLurn
ayback
perlod
AccounLlng raLe of
reLurn
LvaluaLlng lnvesLmenLs
uLure value
n/r 6% 8% 10% 12% 14%
2 1.124 1.166 1.210 1.254 1.300
4 1.262 1.360 1.464 1.574 1.689
6 1.419 1.587 1.772 1.974 2.195
8 1.594 1.851 2.144 2.476 2.853
10 1.791 2.159 2.594 3.106 3.707
12 2.012 2.518 3.138 3.896 4.818
v v (1+r)
n
1he fuLure value of a slngle cash flow afLer n years when compoundlng ls done m Llmes a
year ls
v v ( 1+ r/m)
m x n
v A (1+r)
n
1 / r
uLure value of a AnnulLy
n/r 6% 8% 10% 12% 14%
2 2.060 2.080 2.100 2.120 2.140
4 4.375 4.506 4.641 4.779 4.921
6 6.975 7.336 7.716 8.115 8.536
8 9.897 10.637 11.436 12.300 13.233
10 13.181 14.487 15.937 17.549 19.337
12 16.870 18.977 21.384 24.133 27.271
1 2 3 4 3
1000 1000 1000 1000 1000
1100
1210
1331
1464
6103
uLure value of a annulLy of 8s
1000 deposlLed annually aL Lhe
end of Lhe year r 10
Year Cash FIow PVIF
12%,n
Present VaIue of
IndividuaI Cash
FIow
1 1,000 0.893 893
2 2,000 0.797 1,594
3 2,000 0.712 1,424
4 3,000 0.636 1,907
5 3,000 0.567 1,702
6 4,000 0.507 2,027
7 4,000 0.452 1,809
8 5,000 0.404 2,019
13,375 Present Value of the Cash Flow Stream
resenL value
n/r 6% 8% 10% 12% 14%
2 0.890 0.857 0.826 0.797 0.769
4 0.792 0.735 0.683 0.636 0.592
6 0.705 0.630 0.564 0.507 0.456
8 0.627 0.540 0.467 0.404 0.351
10 0.558 0.463 0.386 0.322 0.270
12 0.497 0.397 0.319 0.257 0.208
resenL value
n/r 6% 8% 10% 12% 14%
2 1.833 1.783 1.736 1.690 1.647
4 3.465 3.312 3.170 3.037 2.914
6 4.917 4.623 4.355 4.111 3.889
8 6.210 5.747 5.335 4.968 4.639
10 7.360 6.710 6.145 5.650 5.216
12 8.384 7.536 6.814 6.194 5.660
resenL value of a AnnulLy
v of a AnnulLy A (1 (1/ 1+r)
n
/ r
Year Cash FIow(Rs.)
0 -1,000,000
1 200,000
2 200,000
3 300,000
4 300,000
5 350,000
nv neL resenL value
nv 1000000 /(110)
0
+ 200000/ (110)
1
+ 200000 / (110)
2
+330000/(110)
3
3272
8ule AccepL Lhe proposal lf nv ls + ve else re[ecL Lhe proposal
nv calculaLlon wlLh Llme varylng dlscounL raLes
ulscounL raLe 14 13 16 18 20
lnvesLmenL 12000 4000 3000 7000 6000 3000
Cash flow
v of C1 4000 / 114 3309
v of C2 3000/ (114 * 113) 3814
v of C3 7000/ (114 * 113 * 116) 4603
v of C4 6000/ (114 * 113 * 116 * 118 ) 3344
v of C3 3000/( 114 * 113 * 116 * 118 * 120) 2322
nv of pro[ecL 3309 + 3814 + 4603 + 3344 + 2322 12000 3392
l88lnLernal 8aLe of 8eLurn
1he l88 of a pro[ecL ls Lhe dlscounL raLe whlch makes lLs nv equal Lo zero
ln oLher words lL ls Lhe dlscounL raLe whlch equaLes Lhe presenL value of
fuLure cash flows wlLh Lhe lnlLlal lnvesLmenL
nv C
L
/ (1+r)
L
lnlLlal lnvesLmenL
lf nv 0
C
L
/ (1+r)
L
lnlLlal lnvesLmenL
lnd Lhe value of r whlch saLlsfles Lhe above equaLlon 1haL value ls l88
l88lnLernal 8aLe of 8eLurn
?ear 0 1 2 3 4
Cash flow (100000) 30000 30000 40000 43000
1o calculaLe Lhe l88
100000 30000 / (1+r)
1
+ 30000 / ( 1 +r)
2
+ 43000 / (1+r)
4
lnd Lhe value of r LhaL saLlsfles Lhe above equaLlon 1haL value ls called Lhe
l88
value of l88 by Lrlal and error ls 1337
ayback erlod
1he payback perlod ls Lhe lengLh of Llme requlred Lo recover Lhe lnlLlal
cash ouLlay of Lhe pro[ecL Conslder Lhe followlng case
?ear AmounL
0 (600000)
1 100000
2 130000
3 130000
4 200000
?ear 0 lnvolves a lnlLlal lnvesLmenL hence a cash ouLflow ?ear 1 Lo 4 glve a
cash lnflow 1he payback perlod ls Lhe number of years ln whlch Lhe lnlLlal
lnvesLmenL ls recovered ln Lhe above case lL ls 4 years
ffn
lL falls Lo conslder Lhe Llme value of money
lL lgnores Lhe cash flows beyond payback perlod
ulscounLed ayback erlod
?ear Cash low
ulcounLlng facLor
[10 resenL value
CumulaLlve neL cash
flow afLer dlscounLlng
0 10000 1 10000 10000
1 3000 0909 2727 7273
2 3000 0826 2478 4793
3 4000 0731 3004 1791
4 4000 0683 2732 941
3 3000 0621 3103
6 2000 0363 1130
7 3000 0313 1339
1he ayback perlod ls beLween 3 and 4 years
AccounLlng 8aLe of 8eLurn
?ear lnvesLmenL uepreclaLlon
lncome before
lnLeresL and 1axes lnLeresL
lncome before
1ax 1ax
lncome
afLer 1ax
1 100 020 030 010 020 0100 0100
2 080 020 033 010 023 0123 0123
3 060 020 040 010 030 0130 0130
4 040 020 040 010 030 0130 0130
3 020 020 033 010 023 0123 0123
Sum 300 100 180 030 130 0630 0630
Average 060 020 036 010 026 0130 0130
Some measures
Average lncome afLer Lax / lnlLlal lnvesLmenL 13 / 10 13
Average lncome afLer Lax / Average lnvesLmenL 13 / 60 217
Average lncome before lnLeresL and Lax / lnlLlal lnvesLmenL 36 / 10 36
Dslng MS Lxcel for flnanclal calculaLlons
roblem 1
uLure value 1000
1lme perlod ls 0 2 4 6 years
ulscounL 8aLe ls 0 3 10
CalculaLe Lhe v's for varlous comblnaLlons
Dslng MS Lxcel for flnanclal calculaLlons
roblem 2
ln a savlng scheme LhaL ln exchange for a lump sum paymenL [usL now of 8s
3000 promlses Lo pay four equal annual amounLs of 8s 600 afLer 1 2 34
years AddlLlonally however a Lermlnal bonus of 8s 1000 ls pald along wlLh
Lhe lasL paymenL of 8s 600
lf Lhe lnLeresL raLe for Lhe perlod ls 9 per annum compounded annually
calculaLe Lhe resenL value of Lhe scheme
roblem 3
A flrm ls Lrylng Lo declde wheLher Lo purchase a new machlne wlLh an lnlLlal
cosL of 8s 10000 1he machlne ls expecLed Lo provlde revenue of 8s 6000 aL
Lhe end of boLh lLs flrsL and second years of use 1here afLer Lhe machlne ls
scrapped wlLhouL any scrap value 1ake dlscounL raLe as 12 CalculaLe Lhe
nv
Dslng MS Lxcel for flnanclal calculaLlons
Dslng MS Lxcel for flnanclal calculaLlons
roblem4
A power sLaLlon ls Lo be consLrucLed [usL now aL an caplLal cosL of $ 100 mllllon
lLs expecLed useful llfeLlme ls 16 years and durlng Lhls Llme lL ls expecLed Lo
produce an average of one mllllon megawaLLhours (MWh) per annum
1he operaLlonal cosLs of Lhe power sLaLlon are esLlmaLed Lo be $ 10 mllllon per
annum ln lLs flrsL year of operaLlon and Lhese are expecLed Lo lncrease aL an
average raLe of 6 over Lhe power sLaLlon's operaLlonal llfe
1he elecLrlclLy produced ls sold aL a prlce of $ 23 per MWh ln Lhe flrsL year of
operaLlon buL Lhls prlce wlll be ralsed aL an annual raLe of 4 per annum
Assumlng LhaL all cosLs and revenues (aparL from Lhe lnlLlal caplLal cosL ) accrue
aL Lhe end of each operaLlonal year and LhaL Lhe company employs a dlscounL
raLe of 13 calculaLe Lhe nv of Lhe pro[ecL and commenL on lLs flnanclal
vlablllLy
Dslng MS Lxcel for flnanclal calculaLlons
roblem3
A foresLry enLerprlse has [usL planLed an area of land wlLh 100000 sapllngs aL
a cosL of $ 11 per Lree $1 of whlch was planLlng cosLs ( Lhe remalnder belng
purchase cosL )
1he Lrees wlll be ready for cuLLlng afLer 10 years aL Lhe earllesL and durlng Lhe
maLurlng perlod grow aL an annual compound raLe such LhaL Lhe value of
usable wood lncreases each year by 20 of Lhe lnlLlal purchase cosL of each
Lree
uurlng Lhe maLurlng perlod Lhe annual cosL of Lenderlng Lhe planLaLlon ls
expecLed Lo be equal Lo 13 of Lhe value of Lhe planLaLlon aL Lhe sLarL of LhaL
year payable aL Lhe sLarL of Lhe second and all subsequenL years ( 1he flrsL
years Lendlng cosLs are lncluded ln Lhe planLlng cosL aL Lhe sLarL of Lhe flrsL
year )
CalculaLe Lhe l88 of Lhe lnvesLmenL lf Lhe foresLry enLerprlse decldes LhaL all
of Lhe Lrees are Lo be felled as soon as Lhey maLure and lf Lhe cosL of Lhls
felllng ls 3 of Lhe value of Lrees felled
Dslng MS Lxcel for flnanclal calculaLlons
roblem 6
?ear 0 1 2 3 4
Cash flow (100000) 30000 30000 40000 43000
CalculaLe Lhe l88