Contents

Part 1...........................................................................................................................................................2
Answer to the question no 1........................................................................................................................2
Answer to the question no 2........................................................................................................................2
Net present value (NPV):......................................................................................................................2
Calculation of Internal rate of return (IRR):......................................................................................4
Payback Period (PP):............................................................................................................................4
Profitability index (PP).........................................................................................................................5
Answer to the question no 3........................................................................................................................5
Answer to the question no 4........................................................................................................................6
Part 2...........................................................................................................................................................7
Answer to the question no 1........................................................................................................................7
Answer to the question no 2........................................................................................................................7
Calculation of Net present value (NPV):..............................................................................................7
Calculation of Internal rate of return (IRR):......................................................................................9
Calculation of Payback Period (PP):....................................................................................................9
Calculation of Modified Internal rate of return (MIRR):..................................................................9
References..............................................................................................................................................10

1
Part 1
Answer to the question no 1
Following are the project ranking based on inspection of cash flows,

Rank Project No Net cash flow

1 3 7,000,000
2 2 5,165,000
3 6 4,200,000
4 7 2,500,000
5 5 2,200,000
6 8 2,150,000
7 4 1,562,000
8 1 1,310,000

Above table shows the rank of the project on the base of new cash flow of 8 projects.

However, time value of money has not shown in the project. Therefore, it is better to measure the
project by different ways in order to get better outcomes.

Answer to the question no 2

In order to rank the projects by using pure quantitative methods, the following methods can be
use,

1. Net present value (NPV)

2. Internal rate or return (IRR)
3. Payback period (PP)
4. Profitability index (PI)

Net present value (NPV):

Following table shows the Net cash flows after considering cost of capital 10% and all the cash
flows in 000.

  Project1 Project2 Project3 Project4 Project5 Project6 Project7 Project8

$ $ $ $
Initial 2,000.0 2,000.0 2,000.0 $ $ 2,000.0 $ 2,000.0
Investment 0 0 0 2,000.00 2,000.00 0 2,000.00 0

2
Year                
$ $ $ $ $ $ $
1 300.00 1514.55   145.45 254.55 1818.00 1090.91 (318.18)
$ $ $ $ $ $
2 272.73 276.03   165.29 231.40   743.80 (49.59)
$ $ $ $ $ $
3 247.93 123.97   262.96 210.37   225.39 45.08
$ $ $ $ $
4 225.39     269.79 191.24   61.47 239.05
$ $ $ $ $
5 204.90     268.84 173.86   43.46 434.64
$ $ $ $ $
6 186.28     248.37 158.05 2258.00   677.37
$ $ $ $
7 169.34     226.82 143.68     1154.61
$ $ $
8 466.51     207.13 130.62      
$ $ $
9       189.15 118.75   848.20  
$ $ $
10   1927.50   172.72 107.95      
$ $
11       157.72 98.14      
$ $
12       143.70 89.22      
$ $
13       130.64 81.11      
$ $
14       119.03 73.73      
$ $ $
15     2154.53 (478.8) 67.03      
$ $ $ $ $ $ $ $
Total DCF 2073.08 3842.5 2154.53 228.22 129.70 4076.00 2942.23 2182.98
Excess of
cash flow                
Over $ $ $ $ $ $ $ $
investment 73.08 1842.5 154.53 228.22 129.70 2076.00 942.23 182.98

3
 Rank 8 2 6 4 7 1 3 5

Calculation of Internal rate of return (IRR):

Project Project 1 Project 2 Project Project Project Project Project 7 Project 8

s 3 4 5 6
IRR 10.87% 28.16% 10.55% 12.33% 11.12% 43.21% 25.43% 11.41%
Rank 6 2 7 4 8 1 3 5

In here, cost of capital is 10%. Therefore, it could be said that, all the project could be acceptable
apart from project 2 as IRR of all the projects are more than 10%.

Payback Period (PP):

Projects Project Project Project Project Project Project Project 7 Project 8

1 2 3 4 5 6
Payback 7 2 15 6 8 1 2 7
Year
Rank 5 2 8 4 7 1 2 5

Profitability index (PP)

Projects Project Project Project Project Project Project Project 7 Project

1 2 3 4 5 6 8
Profitabilit 1.65 3.58 4.5 1.78 2.1 3.1 2.28 2.07
y index
Rank 8 2 1 7 5 3 4 6

4
By looking at the above calculations it could be said that, Project 6 and project 2 has been in the
rank of 4 for all the calculations. Therefore, the company can choose either project 6 or project 2.

By comparing all the methods, it could be said that, the organization can use the NPV method in
order to rank the project and on the base of that they can take decisions as well. It is because,
NPV uses cashflows in order to determine the project. It discounts the cashflows by considering
cost of capital. Therefore, it could be said that, Project 2 has got $1842.5 and project 6 has got
$2076 NPV outcomes.

Therefore, the company can consider project 6 as viable on the base of quantitative outcomes for
decision making process.

Answer to the question no 3

Selected project as per quantitative methods as follows,

Rank 1st 2nd 3rd 4th

Projects Project 6 Project 2 Project 3 Project 4

The above table showing that, it is absolutely the rank will be differ from the ranking obtain by
simple inception of the cash flow.

Answer to the question no 4

Project 1: Bonds

Project 2: Equipment depreciation

Project 3: Land or real estate investment

Project 4: Dairy factory that incur agricultural costs

Project 5: Car loan

Project 6: Stock

Project 7: Trucks depreciation

Project 8: Construction Project

5
Part 2
Answer to the question no 1
Total firm value= $2,000,000 + $500,000 + 2,500,000

= $5,000,000

Therefore,

Formula for WACC is as follows,

2000000 500000 2500000

WACC= {
5000000
∗¿.36)*0.1} + (
5000000
∗0.14 +(
5000000 )
∗0.16)

= 0.0256 + 0.014 + 0.08

=0.1196

= 11.96%

Answer to the question no 2

Calculation of Net present value (NPV):

  Project1 Project2 Project3 Project4 Project5 Project6 Project7 Project8

$ $ $ $
Initial 2,000.0 2,000.0 2,000.0 $ $ 2,000.0 $ 2,000.0
Investment 0 0 0 2,000.00 2,000.00 0 2,000.00 0
Year                
$ $ $ $ $ $ $
1 300.00 1514.55   145.45 254.55 1818.00 1090.91 (318.18)
2 $ $   $ $   $ $

6
 272.73 276.03 165.29 231.40 743.80 (49.59)
$ $ $ $ $ $
3 247.93 123.97   262.96 210.37   225.39 45.08
$ $ $ $ $
4 225.39     269.79 191.24   61.47 239.05
$ $ $ $ $
5 204.90     268.84 173.86   43.46 434.64
$ $ $ $ $
6 186.28     248.37 158.05 2258.00   677.37
$ $ $ $
7 169.34     226.82 143.68     1154.61
$ $ $
8 466.51     207.13 130.62      
$ $ $
9       189.15 118.75   848.20  
$ $ $
10   1927.50   172.72 107.95      
$ $
11       157.72 98.14      
$ $
12       143.70 89.22      
$ $
13       130.64 81.11      
$ $
14       119.03 73.73      
$ $ $
15     2393.92 (478.8) 67.03      
$ $ $ $ $ $ $ $
Total DCF 2073.08 3842.5 2154.53 228.22 129.70 4076.00 2942.23 2182.98
Excess of
cashflow
Over $ $ $ $ $ $ $ $
investment 73.08 1842.5 154.53 228.22 129.70 2076.00 942.23 182.98
Rank 8 2 6 4 7 1 3 5

7
Calculation of Internal rate of return (IRR):

Projects Project Project Project Project Project Project Project 7 Project 8

1 2 3 4 5 6
IRR 10.87% 28.16% 10.55% 12.33% 11.12% 43.21% 25.43% 11.41%
Rank 6 2 7 4 8 1 3 5

In here, cost of capital is 10%. Therefore, it could be said that, all the project could be acceptable
as IRR is above 10% of all the projects.

Calculation of Payback Period (PP):

Projects Project 1 Projec Project Project Project Project Project 7 Project 8

t2 3 4 5 6
Payback 7 2 15 6 8 1 2 7
Year
Rank 5 2 8 4 7 1 2 5

Calculation of Modified Internal rate of return (MIRR):

Projects Project Project Project Project Project Project Project 7 Project 8

1 2 3 4 5 6
IRR 10.49% 17.42% 10.55% 10.65% 10.46% 24.76% 15.13% 11.18%
Rank 7 2 6 5 8 1 3 4

References
berk, J. & Demarzo, P., 2016. Corporate Finance, Global Edition. London: Pearson.

Collings, S., 2013. Corporate Finance For Dummies. West Succex: John welly and
sons.

Hillier, D., 2016. Corporate Finance: European Edition (UK Higher Education Business
Finance). Berkshire: Mcgrewhill.

Terence, T., 2018. Corporate Finance: The Basics. Oxon: Apex.

8
Warner, S. & Hussain, S., 2017. The Finance Book: Understand the numbers even if
you're not a finance professional. London: FT Publishing.