Net present value

-is used in Capital budgeting to analyze the profitability of a project or investment

∑ 𝐶𝑎𝑠ℎ 𝑓𝑙𝑜𝑤𝑠
NPV =
(1+𝑟)𝑖

i- Initial Investment
Cash flows= Cash flows in the time period
r = Discount rate
i = time period
Example 1: Let us say Nice Ltd wants to expand its business and so it is willing to invest Rs
10,00,000.
The investment is said to bring an inflow of Rs. 100,000 in first year, 250,000 in the second
year, 350,000 in third year, 265,000 in fourth year and 415,000 in fifth year. Assuming the
discount rate to be 9%. Let us calculate NPV using the formula.

Year Flow Present value Computation

0 -1000000 -1000000

1 100000 91743 100000/(1.09)

2 250000 210419 250000/(1.09)^2

3 350000 270264 350000/(1.09)^3

4 265000 187732 265000/(1.09)^4

5 415000 269721 415000/(1.09)^5

NPV = 269721 + 187732 + 270264 + 210419 + 91743 – 1000000 = 29879

Example 2: Many projects generate revenue at varying rates over time. In this case, the formula
for NPV can be broken out for each cash flow individually. For example, imagine a project that
costs $1,000 and will provide three cash flows of $500, $300, and $800 over the next three
years. Assume there is no salvage value at the end of the project and the required rate of return
is 8%. The NPV of the project is calculated as follows:

NPV=500 /(1+0.08)^1+300 / (1+0.08)^2+800 / (1+0.08)^3−$1000=$355.23

Internal rate of return
-is the discount rate that makes the net present value (NPV) of a project is zero
𝐶𝑡
𝑁𝑃𝑉 = ∑𝑇𝑡=1 − 𝐶0 = 0
(1+𝑟)𝑡

where:
Ct=Net cash inflow during the period t
C0=Total initial investment costs
IRR=The internal rate of return
t=The number of time periods

Explicit Reinvestment Rate of Return

Net Profit (Pb) = G – (O + M + D)
Rate of Return = (Pb/C) x 100

Where:
G = Annual income
C = Capital investment
O + M = Operations and maintenance (this include the expenses of direct materials, direct labor
and overhead, including the property taxes but excluding depreciation)
D = depreciation (sinking fund)
Pb = profit before tax

Payback Period Method

investment−cash outflow
PP =
net annual cash inflow
Example 3:

Due to increased demand, the management of Rani Beverage Company is considering to

purchase a new equipment to increase the production and revenues. The useful life of the
equipment is 10 years and the company’s maximum desired payback period is 4 years. The
inflow and outflow of cash associated with the new equipment is given below:

Initial cost of equipment: $37,500

Annual cash inflows: Sales: $75,000
Annual cash Outflows:
Cost of ingredients: $45,000
Salaries expenses: $13,500
Maintenance expenses: $1,500
Non-cash expenses: Depreciation expense: $5,000

Net Annual Cash Inflow = $75,000 – ($45,000 + $13,500 + $1,500) = $15,000

PP= $37,500/$15,000 =2.5 years

10 Principles of Ergonomics
1.Work in Neutral Postures
2. Reduce Excessive Force
3. Keep Everything in Easy Reach
4. Work at proper heights
5. Reduce Excessive Motions
6. Minimize Fatigue and Static Load
7. Minimize Pressure Points
8. Provide Clearance
9. Move, exercise, and stretch
10. Maintain a Comfortable Environment