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yr.

horizon

30000

40000

40000

15000

the period for which asset will live

-100000

1 how many years will it take for the investment to come back ?
cumulative flows

30000

70000

110000

125000

choose the year which overakes the investment


come to the previous year
ascertain what remains to be captured
flows in the next year
which means we need

payback

30000
40000
30000/40000

2 Yrs 9 months

of year 3
to cover the 100000 invest
0.75
2 years
we can recoup the investm

interest rate

to cover the 100000 investment


9 months
9 months
we can recoup the investment

13%

investment
yearly inflows
horizon
find payback period

horizon
-90000

90000
23000
6 years
?

yr. 0
1
2
3
4
5
6

cumulative flows
23000
23000
23000
23000
23000
23000

23000
46000
69000
92000 year 4
115000
138000

advantages of this method

amount

disadvantages of this method

-10000
a
1
2
3
4
5
6

a
b

b
40000
50000
20000
0
0

2.5
3.4

40000
90000
110000
110000
110000

30000
25000
30000
40000
50000

30000
55000
85000
125000
175000
175000

disadvantages of this method

0
-100000

1
30000

2
40000

3
40000

4
15000
interest rate

1 discount all inflows at the interest rate


2 cumulate the discounted fig.
3 find payback
1 26548.67 31325.87 27722.01 9199.781
2 26548.67

13%

investment
90000
yearly inflows
23000
horizon
7 years
Discounted payback ?
rate
14%
yr.0
1
2
3
4
5
6
7

-90000
23000
23000
23000
23000
23000
23000
23000

at end of year 6
to be covered
dis flows in yr 7
period in yr 7
discounted payback

flows
20175.44
17697.75
15524.34
13617.85
11945.48
10478.49
9191.658

cmlt
20175.44
37873.19
53397.54
67015.38
78960.86
89439.35
98631.01

89439.35
560.6471
98631.01
0.060995
6.09 years

1
30000

-100000

2
40000

3
40000

4
15000

5
20000
interest rate

26548.67
PV of inflows

31325.87 27722.01 9199.781

13%

10855.2

105651.5
Net present value method

NPV method

PV of inflows

to be compared with outlay(invesetment)

IF PV of inflows

is greater than

outlay

accept

IF PV of inflows

is less than

outlay

reject

investment
PV of inflows
so accepted!!

0
-100000

1
30000

2
40000

3
40000

-100000
105651.5

4
15000

5
20000
interest rate

excel's NPV

105651.53

NPV

diff between the sum of inflows and the investment

13%

invst

-100000
A
1
2
3
4
5
6
pv of inflows
NPV

B
40000
50000
20000
0
0

Rs. 85,740.12
-Rs. 14,259.88
for A

30000
25000
30000
40000
50000
55000
Rs. 136,223.02
Rs. 36,223.02
for B

NPV

you need the interest rate

-100000

30000

called as
interest rate
hurdle rate
discounting rate
cost of capital

25000

30000

40000

1
25000

2
25000

3
25000

50000

55000

return the project

yr0
50000

0 21739.13 18903.59 16437.91


57080.63

15%

investment

1
2
3
4
5
6
7
8
9
10
11
12

Rs. 560,000.00

80000
80000
80000
80000
80000
80000
80000
80000
80000
80000
80000
80000

80000
160000
240000
320000
400000
480000
560000 this year is payback year
640000
720000
800000
880000
960000

80000 yearly inflows

extended period

1
2
3
4
5
6
7
8
9
10
11
12

80000
80000
80000
80000
80000
80000
80000
80000
80000
80000
80000
80000

disc. Payback
72072.07207
64929.79466
58495.3105
52698.47793
47476.10624
42771.26689
38532.67287
34714.1197
31273.98172
28174.7583
25382.66514
22867.26589

13
14
15
16
17

80000
80000
80000
80000
80000

20601.14044
18559.58598
16720.34773
15063.37634
13570.60931

cumulative
72072.072
137001.867
195497.177
248195.655
295671.761
338443.028
376975.701
411689.821
442963.803
471138.561
496521.226
519388.492
539989.632
558549.218
575269.566
590332.942
603903.552

During the life of the discounted payb

at the end of 14
still remainin
portion in year 15
discounted payback

life of the discounted payback cannot be achieved

558549.2
1450
0.08676
14.09 years

0
-Rs. 1,000,000.00
cumulative

1
Rs. 520,000.00
Rs. 520,000.00
afte 2 years
to be covered
portion in year
payback

2
3
Rs. 365,000.00
Rs. 385,000.00
Rs. 885,000.00 Rs. 1,270,000.00
Rs. 885,000.00
Rs. 115,000.00
0.2987
2.30 years

find npv of the problem 2


Rs. -40,611.51 NPV function

investment
1
2
3
4
5
6
7
8

75000
75000
75000
75000
75000
75000
75000
75000
b
86000
86000
86000
86000
86000
86000
86000

450000
disc
68807.34
63126
57913.76
53131.89
48744.85
44720.05
41027.57
37639.97

cumult.
68807.34
131933.3
189847.1
242979
291723.8
336443.9
377471.5
415111.4

d
500000
500000
500000
500000
500000
500000
500000
500000

a
b
c
d

-34888.57
-256315.98
-16180.12
Rs. 1,358.58

only option d is viable


10000
10000
10000
10000

A
B

Rs. 7,876,902.74

3000000
3000000
3000000
3000000
3000000
3000000
3000000

9.50%
A

580000
580000
580000
580000
680000

Rs. 290,553.86

445000
445000
445000
445000
645000

Rs. 385,715.94

325000
325000
325000
325000
475000

Rs. 68,189.51

investment
pmt
value at the end of 3 years

yr.0
-50000

50000
5000
50000

1
5000

2
5000

3
55000

5000/(1+r) 5000/(1+r)^2 5000/(1+r)^3

4545.4545 4132.231405 41322.31405

10%

INITIAL INVESTMENT

-5000000

-4850000

1
2
3
4
5

1380000
1450000
1460000
1524000
1400000

1256000
1256000
1312000
1312000
2060000

Rs. 190,200.29
13.51%

Rs. 209,258.81
13.60%

NPV
IRR

L
-500
150
175
200

NPV
IRR

-350
125
175
225

Rs. -97.00 Rs. 48.01


2.36%
20.97%

s
12

t
-538
126
476
206

NPV
IRR
Payback

-526
200
300
200

Rs. 97.67 Rs. 31.67


21.83%
15.71%

independent projects

NPV+ve

IRR>coc

NPV -ve

irr<COC

mutually exclusive
A
yr. 0
1
2
3
4
5

16%
Project A
year

0
1
2
3
4
5
6

4%
5%
6%
7%
8%
9%
10%
11%
12%
13%
14%
15%
16%
17%
18%
19%
20%

Project B
-450000
197000
147000
97000
97000
97000
97000

-590000
145000
154000
268000
142000
118000
99000

NPV
IRR

Rs. 182,931.70
19.01%

Rs. 202,441.42
15.76%

NPV A
NPVB
Rs. 200,868.93
Rs. 182,931.70
Rs. 165,819.90
Rs. 149,484.23
Rs. 133,878.86
Rs. 118,961.22
Rs. 104,691.69
Rs. 91,033.38
Rs. 77,951.92
Rs. 65,415.24
Rs. 53,393.42
Rs. 41,858.53
Rs. 30,784.42
Rs. 20,146.68
Rs. 9,922.43
Rs. 90.24
-Rs. 9,369.96

Rs. 226,666.49
Rs. 202,441.42
Rs. 179,314.73
Rs. 157,222.78
Rs. 136,106.33
Rs. 115,910.16
Rs. 96,582.82
Rs. 78,076.27
Rs. 60,345.67
Rs. 43,349.08
Rs. 27,047.32
Rs. 11,403.68
-Rs. 3,616.20
-Rs. 18,044.54
-Rs. 31,911.54
-Rs. 45,245.56
-Rs. 58,073.24

cost of capital
5%

in mutually exclusive projects if coc is < cross o


go by the NPV decision
if cost>crossover rate
both NPV and IRR will agree with each other

Rs. 250,000.00
Rs. 200,000.00
Rs. 150,000.00
Rs. 100,000.00
Rs. 50,000.00

1st point attack to IRR


The crossover point

Rs. 0.00
4%
-Rs. 50,000.00
-Rs. 100,000.00

5%

6%

rojects if coc is < cross over rate there will be conflict

agree with each other

Chart Title

6%

7%

8%

9%

10%

11%

NPV A

12%

NPVB

13%

14%

15%

16%

17%

18%

19%

20%

A
B
1 Rs. 1,000,000.00
Rs. 225,000.00
2
Rs. 225,000.00
3
Rs. 225,000.00
4
Rs. 225,000.00
5
Rs. 225,000.00
6
Rs. 225,000.00
7
Rs. 225,000.00
Rs. 1,132,414.39

Rs. 198,690.52 indifferent instalment

IRR

NO IRR as there is no reciept

1
2
3
4
5
6
NPV
IRR

Project K
Project L
-1500000
-150000
450000
45000
450000
45000
450000
45000
450000
45000
450000
45000
450000
45000
Rs. 459,867.31 Rs. 45,986.73
19.905%

19.905%

2nd point of attack to IRR


scale difference is not understood by IRR

understood by IRR

coc

19%

6%

beginning payment

-2000000

installment

450000
450000
500000
500000
500000
600000
600000
600000
600000
700000
Rs. 237,832.62 Rs. 1,958,985.70
22.095%
22.095%

NPV
IRR
for 19%

for 6 %

-100000
120000
20.00%

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45

-2000000
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010

46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92

21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010

93
94
95
96
97
98
99
100
101
102
103
104
105
106
107
108
109
110
111
112
113
114
115
116
117
118
119
120
121
122
123
124
125
126
127
128
129
130
131
132
133
134
135
136
137
138
139

21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010

140
141
142
143
144
145
146
147
148
149
150
151
152
153
154
155
156
157
158
159
160
161
162
163
164
165
166
167
168
169
170
171
172
173
174
175
176
177
178
179
180
181
182
183
184
185
186

21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010

187
188
189
190
191
192
193
194
195
196
197
198
199
200
201
202
203
204
205
206
207
208
209
210
211
212
213
214
215
216
217
218
219
220
221
222
223
224
225
226
227
228
229
230
231
232
233

21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010
21010

234
235
236
237
238
239
240

21010
21010
21010
21010
21010
21010
21010
0.94%

0.94% monthly rate

-3000
23.13%

1
0

2
0

3
5600

-2000000
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20

200000
200000
200000
200000
200000
200000
200000
200000
200000
200000
200000
200000
200000
200000
200000
200000
200000
200000
200000
200000 per quarter

11%

7.75% NPV will be 0


1.450384

Rs. -407,334.38

IRR
rate

S
-1750000
766111
471667
311236
478252
478252
478252

-1345000
330551
551068
659000
365920
304074
255113

19.47%

22.46%

NPV R
2%
3%
4%
5%
6%
7%
8%
9%
10%
11%
12%
13%
14%
15%
16%
17%
18%
19%
20%

NPV S
1047398.03
961207.11
879285.12
801363.82
727194.81
656547.83
589209.29
524980.90
463678.40
405130.43
349177.53
295671.17
244472.93
195453.65
148492.82
103477.82
60303.39
18871.06
-20911.33

969725.14
899501.30
832515.57
768576.85
707507.53
649142.34
593327.42
539919.36
488784.41
439797.75
392842.75
347810.42
304598.75
263112.28
223261.56
184962.72
148137.08
112710.78
78614.42

120000000%
100000000%
80000000%
60000000%
40000000%
20000000%

-20000000%

Chart Title
120000000%
100000000%
80000000%
60000000%
40000000%
20000000%
0%
-20000000%

5
rate

10 11 12 13 14 15 16 17 18 19
NPV R

NPV S