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M2 - Capital Budgeting
M2 - Capital Budgeting
Ex.
1
A project will cost Rs 50,000 today. It is expected to generate cash flows of Rs 30,000, Rs
25,000 and Rs 15,000 each year through year 1 to 3. The discount rate is 18 percent. Calculate
the project's NPV and IRR.
IRR of An Investment Project
Year Cash Flow (Rs)
0 0C -50000
1 C1 30000
2 C2 25000
3 C3 15000
IRR IRR(E8:E11) 21%
NPV NPV(.18,E9:E11)+E8INR 2,507.80
Ex. From the cash flows given in the following table, calculate NPV at different discount rate. Draw an NPV
2 profile of the project.
Hint: Notice that cash flows are constant, and the discount rate changes. Write the NPV formula in F22 and
copy. Go to Insert>chart to draw the NPV profile.
Ex.
3 From the following cash flows, calculate Project's NPV (i) without using Excel built-in function,
and (ii) using Excel built-in function.
Hint: You will have to determine PVF at 10% and multiply each cash flow by its PVF to obtain discounted
cash flow (DCF). Sum all DCFs to obtain NPV.
Ex.
4 M and N are two mutually exclusive project. The cash flows are shown below. Calculate
projects' NPV at 9% and IRR. Why these two methods rank projects differently? Show your
calculations.
NPV
NPV 2100
Discount
Project M Project N Rate Project M Project N
1600
-3360 -3360 0% 1120 1620
2800 280 5% 818 1039
1400 1680 10% 553 552 1100
280 3020 15% 317 139
IRR 23% 17% 20% 108 -212 600
NPV 603 643 25% -81 -515
30% -250 -776 100
0% 5% 10%
-400
NPV and IRR methods rank project's differently because their cash flow patterns are
different. Project M returns more cash flows earlier than Project N. At 10% discount rate
two projects obtain the same NPV; this is a break-even rate.
Ex.
5 A project has an initial cash outflow of Rs 1,000 followed by a cash inflow of Rs 4,000 after one year and a
cash outflow of Rs 3,750 after two years. Determine the project's NPV at discount rates of 0%, 50%, 100%,
150% and 200%. Draw the project's NPV profile and interpret the results.
-3750 1.00 63
1.50 0 0
2.00 -83
-250
0 -750
50 - -500
100 63
150 -
-750
200 -83
0 50 100 150 200 250
Discount rate
e NPV Profile
NPV
100
Project
M
600 Project
N
100
600
100
0% 5% 10% 15% 20% 25% 30% 35%
400
Discount Rate
(%)