EFM : S AMPLE Q UESTIONS FOR R EVISION

Sample 1:

A company is evaluating two projects X and Y. The initial costs for Project X and Y are
$450,000 and $900,000 respectively. The expected cash-flows for the two projects are
given as follows:
Year Project X Project Y
1 $150,000 $400,000
2 $250,000 $400,000
3 $150,000 $400,000
4 $ 50,000 -

i) Calculate the NPV for Project X at 10% and 20% as required rate of return.

Solution:
Year Cash-flows 10% PV 20% PV
0 - 450,000 1 - 450,000 1 - 450,000
1 150,000 0.909 136,350 0.833 124,950
2 250,000 0.826 206,500 0.694 173,500
3 150,000 0.751 112,650 0.579 86,850
4 50,000 0.683 34,150 0.482 24,100
NPV = NPV = -40,600
39,650

ii) Calculate the IRR for Project X.

Solution:

IRR = 10 + 39,650 ( 20 – 10 )
39,650 + 40,600

= 14.94%

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(iii) Calculate the NPV for Project Y at 10% and 20% as required rate of return.

Solution:

Year Cash flows 10% PV 20% PV

0 -900,000 1 -900,000 1 -900,000
1 400,000 0.909 363,600 0.833 333,200
2 400,000 0.826 330,400 0.694 277,600
3 400,000 0.751 300,400 0.579 231,600
NPV = NPV = -57,600
94,400

(iv) Calculate the IRR for Project Y.

Solution:
IRR = 10 + 94,400( 20 – 10 )
94,400 + 57,600
= 16.21%

Sample 2:

A company is considering replacing one of its equipment using any of the following two
alternatives. Both of this equipment has estimated useful lives of 5 years. Other details are as
below:

Equipment
1 2
$ $
Cost 155,000 170,000

Expected net cash inflows:

Year 1 29,000 26,000
Year 2 53,000 62,000
Year 3 65,000 50,000
Year 4 35,000 26,000
Year 5 29,000 14,000

Trade-in-values (end of Year 5) 23,000 20,000

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Required:
Calculate

(a) Which of the two equipment is likely to yield the better return (based on the net
present value method) using:

(i) 10% and

(ii) 15% as the required rate

(b) The internal rate of return for Equipment 1.

(c) The accounting rate of return (on initial capital) for equipment 1.

(d) The profitability index figures for both equipment at 10%.

Solution

(a) (i)

Net Present Value Statement

Equipment 1 Equipment 2
Year Discount Cash flow Present value Cash flow Present value
factor 10%
0 1.0000 (155,000) (155,000) (170,000) (170,000)
1 0.9091 29,000 26,364 26,000 23,634
2 0.8264 53,000 43,799 62,000 51,237
3 0.7513 65,000 48,835 50,000 37,565
4 0.6830 35,000 23,905 26,000 17,758
5 0.6209 52,000 32,287 34,000 21,111
Net present value 20,190 (18,695)

(ii)

Net Present Value Statement

Equipment 1 Equipment 2
Year Discount Cash flow Present value Cash flow Present value
factor 15%
0 1.0000 (155,000) (155,000) (170,000) (170,000)
1 0.8696 29,000 25,218 26,000 22,610
2 0.7561 53,000 40,073 62,000 46,878
3 0.6575 65,000 42,738 50,000 32,875
4 0.5718 35,000 20,013 26,000 14,867
5 0.4972 52,000 25,854 34,000 16,905
Net present value (1,104) (35,865)

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(b) Internal rate of return for Equipment 1:
•
• IRR =Interest 1 + NPV1 x (Interest 2 – Interest 1)
NPV1 + | NPV2 |

= 10% + [{20,190 / (20,190 + 1,104)} (15% - 10%)

= 10% + 4.74%

= 14.74%

(c) Accounting rate of Return (Equipment 1)

= Average annual profit after x 100%

depreciation
Original capital employed

= [$20,400 / $155,000] x 100%

= 13.16%

(d)
Equipment 1 Equipment 2

Profitability Index at 10%:

= Present value of Cash Inflows = $175,190 / $155,000 = $151,305 / $170,000

Initial investment
= 1.13 = 0.89

Workings
(W1)
Total profits for 5 years = $234,000

Average annual profits = [$234,000 / 5 years]

= $46,800

Annual depreciation = [($155,000 - $23,000) / 5 years]

= $26,400

Therefore, average annual profits after depreciation = $46,800 - $26,400

= $20,400

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Sample 3:
The table below shows the initial cost and net present value (NPV) of several projects.

Project Initial cost NPV

A $25,000 $5,000
B $400,000 $50,000
C $1.8 million $0.6 million

Calculate the profitability index for each project and hence rank the project in
order of preference.

Solution:
Project Initial cost NPV PV Profitability
index
A $25,000 $5,000 $30,000 1.20
B $400,000 $50,000 $450,000 1.125
C $1.8 million $0.6 million $2.4 million 1.333

PI = Total PV of the project / initial Cost

Rank: C, A and B

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APPENDIX
T ABLE P RESENT V ALUE I NTEREST F ACTORS FOR O NE D OLLAR
DISCOUNTED AT ¼ P ERCENT FOR N P ERIODS :
= 1 .
0
(1 + X )
Period 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 .990 .980 .971 .962 .952 .943 .935 .926 .917 .909
2 .980 .961 .943 .925 .907 .890 .873 .857 .842 .826
3 .971 .942 .915 .889 .864 .840 .816 .794 .772 .751
4 .961 .924 .888 .855 .823 .792 .763 .735 .708 .683
5 .951 .906 .863 .822 .784 .747 .713 .681 .650 .621
6 .942 .888 .837 .790 .746 .705 .665 .630 .596 564.
7 .933 .871 .813 .760 .711 .665 .623 .583 .547 .513
8 .923 .853 .789 .731 .677 .627 .582 .540 .502 .467
9 .914 .837 .766 .703 .645 .592 .544 .500 .450 .424
10 .905 .820 .744 .676 .614 .558 .508 .463 .422 .386
11 .896 .804 .722 .650 .585 .527 475. .429 .388 .350
12 .887 .789 .701 .625 .557 .497 .444 .397 .356 .319
13 .879 .773 .681 .601 .530 .469 .415 .368 .326 .290
14 .870 .758 .661 .577 .505 .442 .388 .340 .299 .263
15 .861 .743 .642 .555 .481 .417 .362 .315 .275 .239
16 .853 .728 .623 .534 .458 .394 .339 .292 .252 .218
17 .844 .714 .605 .513 .436 .371 .317 .270 .231 .198
18 .836 .700 .587 .494 .416 .350 .296 .250 .212 .180
19 .828 .686 .570 .475 .396 .331 .277 .232 .194 .164
20 .820 .673 .554 .456 .377 .312 .258 .215 .178 .149
21 .811 .660 .538 .439 .359 .294 .242 .199 .164 .135
22 .803 .647 .522 .422 .342 .278 .226 .184 .150 .123
23 .795 .634 .507 .406 .326 .262 .211 .170 .138 .112
24 .788 .622 .492 .390 .310 .247 .197 .158 .126 .102
25 .780 .610 .478 .375 .295 .233 .184 .146 .116 .092
30 .742 .552 .412 .308 .231 .174 .131 .099 .075 .057
35 .706 .500 .355 .253 .181 .130 .094 .068 .049 .036
40 .672 .453 .307 .208 .142 .097 .067 .045 .032 .022
45 .639 .410 .264 .171 .111 .073 .048 .031 .021 .014
50 .608 .372 .228 .141 .087 .054 .034 .021 .013 .009

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T ABL E A P RESENT V ALU E I NTEREST F ACTORS FOR O NE D OLLAR
DISCOUNTED AT ¼ P ERCENT FOR N P ERIODS : ( CONTINUED )
= 1
(1 + X ) 0
Period 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 .901 .893 .885 .877 .870 .862 .855 .847 .840 .833
2 .812 .797 .783 .769 .756 .743 .731 .718 .706 .694
3 .731 .712 .693 .675 .658 .641 .624 .609 .593 .579
4 .659 .636 .613 .592 .572 .552 .534 .516 .499 .482
5 .593 .567 .543 .519 .497 .476 .456 .437 .419 .402
6 .535 .507 .480 .455 .432 .410 .390 .370 .352 .335
7 .482 .452 .425 .400 .376 .354 .333 .314 .296 .279
8 .434 .404 .376 .351 .327 .305 .285 .266 .249 .233
9 .391 .361 .333 .308 .284 .263 .243 .225 .209 .194
10 .352 .322 .295 .270 .247 .227 .208 .191 .176 .162
11 .317 .287 .261 .237 .215 .195 .475 .429 .388 .350
12 .286 .257 .231 .208 .187 . .444 .397 .356 .319
13 .258 .229 .204 .182 .163 .469 .415 .368 .326 .290
14 .232 .205 .181 .160 .141 .442 .388 .340 .299 .263
15 .209 .183 .160 .140 .123 .417 .362 .315 .275 .239
16 .853 .728 .623 .534 .458 .394 .339 .292 .252 .218
17 .844 .714 .605 .513 .436 .371 .317 .270 .231 .198
18 .836 .700 .587 .494 .416 .350 .296 .250 .212 .180
19 .828 .686 .570 .475 .396 .331 .277 .232 .194 .164
20 .820 .673 .554 .456 .377 .312 .258 .215 .178 .149
21 .811 .660 .538 .439 .359 .294 .242 .199 .164 .135
22 .803 .647 .522 .422 .342 .278 .226 .184 .150 .123
23 .795 .634 .507 .406 .326 .262 .211 .170 .138 .112
24 .788 .622 .492 .390 .310 .247 .197 .158 .126 .102
25 .780 .610 .478 .375 .295 .233 .184 .146 .116 .092
30 .742 .552 .412 .308 .231 .174 .131 .099 .075 .057
35 .706 .500 .355 .253 .181 .130 .094 .068 .049 .036
40 .672 .453 .307 .208 .142 .097 .067 .045 .032 .022
45 .639 .410 .264 .171 .111 .073 .048 .031 .021 .014
50 .608 .372 .228 .141 .087 .054 .034 .021 .013 .009

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C OM POUND T ABLE
F UTURE V ALUE I NTEREST F ACTORS FOR O N E D OLLAR DISCOUNTED AT ¼
P ERCENT FOR N P ERIODS :
0
FVIF = (1 + X )

Period 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 1.010 1.020 1.030 1.040 1.050 1.060 1.070 1.080 1.090 1.100
2 1.020 1.040 1.061 1.082 1.102 1.124 1.145 1.168 1.188 1.210
3 1.030 1.061 1.093 1.125 1.158 1.191 1.225 1.260 1.295 1.331
4 1.041 1.082 1.126 1.170 1.216 1.262 1.311 1.360 1.412 1.464
5 1.051 1.104 1.159 1.217 1.276 1.338 1.403 1.459 1.539 1.611
6 1.062 1.126 1.194 1.265 1.340 1.419 1.501 1.587 1.677 1.772
7 1.072 1.149 1.230 1.316 1.407 1.504 1.606 1.714 1.828 1.949
8 1.083 1.172 1.267 1.369 1.477 1.594 1.718 1.851 1.993 2.144
9 1.094 1.195 1.305 1.423 1.551 1.689 1.838 1.999 2.172 2.358
10 1.105 1.219 1.344 1.480 1.629 1.791 1.967 2.159 2.367 2.594
11 1.116 1.243 1.384 1.539 1.710 1.898 2.105 2.332 2.580 1.853
12 1.127 1.268 1.426 1.601 1.796 2.012 2.252 2.518 2.813 3.138
13 1.138 1.294 1.469 1.665 1.886 2.133 2.410 2.720 3.066 3.452
14 1.149 1.319 1.513 1.732 1.980 2.261 2.579 2.937 3.342 3.797
15 1.161 1.346 1.558 1.801 2.079 2.397 2.759 3.172 3.642 4.177
16 1.173 1.373 1.605 1.873 2.183 2.540 2.952 3.426 3.970 4.595
17 1.184 1.400 1.653 1.948 2.292 2.693 3.159 3.700 4.328 5.054
18 1.196 1.428 1.702 2.026 2.407 2.854 3.380 3.996 4.717 5.560
19 1.208 1.457 1.753 2.107 2.527 3.026 3.616 4.316 5.142 6.116
20 1.220 1.486 1.806 2.191 2.653 3.207 3.870 4.661 5.604 6.727
21 1.232 1.516 1.860 1.179 2.786 3.399 4.140 5.034 6.109
22 1.245 1.546 1.916 2.370 2.925 3.603 4.430 5.436 6.658
23 1.257 1.577 1.974 2.465 3.071 3.820 4.740 5.871 7.258 8.954
24 1.270 1.608 2.033 2.563 3.225 4.049 5.072 6.341 7.911 9.850
25 1.282 1.641 2.094 2.666 3.386 4.292 5.427 6.848 8.623 10.834
30 1.348 1.811 2.427 3.243 4.322 5.743 7.612 10.062 13.267 17.449
35 1.417 2.000 2.814 3.946 5.516 7.686 10.676 14.785 20.413 28.102
40 1.489 2.208 3.262 4.801 7.040 10.285 14.974 21.724 31.408 45.258
45 1.565 2.438 3.781 5.841 8.965 13.764 21.002 31.920 48.325 72.888
50 1.645 2.691 4.384 7.106 11.467 18.419 29.456 46.900 74.354 117.386

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F UTURE V ALUE I NTEREST F ACTORS FO R O NE D OLLAR DISCOUNTED AT ¼
P ERCENT FOR N P ERIODS :
FVIF = (1 + X ) 0 (C ONT ’ D )

Period 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%

1 1.110 1.120 1.130 1.140 1.150 1.160 1.170 1.180 1.190 1.200
2 1.232 1.254 1.277 1.300 1.322 1.346 1.369 1.392 1.416 1.440
3 1.368 1.405 1.443 1.482 1.521 1.561 1.602 1.643 1.685 1.728
4 1.518 1.574 1.630 1.689 1.749 1.811 1.874 1.939 2.005 2.074
5 1.685 1.762 1.842 1.925 2.011 2.100 2.192 2.288 2.386

6 1.870 1.974 2.082 2.195 2.313 2.436 2.565 2.700 2.840

7 2.076 2.211 2.353 2.502 2.660 2.826 3.001 3.185 3.379 3.583
8 2.305 2.476 2.658 2.853 3.059 3.278 3.511 3.759 4.021 4.300
9 2.558 2.773 3.004 3.252 3.518 3.803 4.108 4.435 4.785 5.160
10 2.839 3.106 3.395 3.707 4.046 4.411 4.807 5.234 5.695 6.192

11 3.152 3.479 3.836 4.226 4.652 5.117 5.624 6.176 6.777 7.430
12 3.498 3.896 4.334 4.8118 5.350 5.936 6.580 7.288 8.064 8.916
13 3.883 4.363 4.898 5.492 6.153 6.886 7.699 8.599 9.596 10.699
14 4.310 4.887 5.535 6.261 7.076 7.987 9.007 10.147 11.420 12.839
15 4.785 5.474 6.254 7.138 8.137 9.265 10.539 11.974 13.589 15.407

16 5.311 6.130 7.067 8.137 9.358 10.748 12.330 14.129 16.171 18.488
17 5.895 6.866 7.986 9.276 10.761 12.468 14.426 16.672 19.244 22.186
18 6.543 7.690 9.024 10.575 12.375 14.462 16.879 19.673 22.900 26.623
19 7.263 8.613 10.197 12.055 14.232 16.776 19.748 23.214 27.251 31.948
20 8.062 9.646 11.523 13.743 16.366 19.461 23.105 27.393 32.429 38.337

21 8.949 10.804 13.021 15.667 18.821 22.574 27.033 32.323 38.591 46.005
22 9.933 12.110 14.713 17.861 21.644 26.186 31.629 38.141 45.923 55.205
23 11.026 13.552 16.626 20.361 24.891 30.376 37.005 45.007 54.648 66.247
24 12.239 15.178 18.788 23.212 28.625 35.236 43.296 53.108 65.031 79.496
25 13.585 17.000 21.230 26.461 32.918 40.874 50.656 62.667 77.387 95.395

30 22.895 29.960 39.115 50.949 66.210 85.849 111.061 143.367 184.672 237.373

35 38.574 52.799 72.066 98.097 133.172 180.311 243.495 327.988 440.691 590.657

40 64.999 93.049 132.776 188.876 267.856 378.715 533.846 750.353 1051.642 1469.740

45 109.527 163.985 244.629 363.662 538.752 795.429 1170.425 1716.619 2509.583 3657.176

50 184.559 184.559 450.711 700.197 1083.619 1670.080 2566.080 3927.189 5988.730 9100.191

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Page 10 of 10