Answer - 1

The summary of investment appraisal results are as follows:

Option I Option II

Net present value (Rs. in million) 82 107.41 (W1)

Payback period (years) 3.10 3.83 (W2)
Internal rate of return 10.50% 15.11% (W3)
13.20% 14.30% (W4)
Modified internal rate of return
-
On financial ground, the project to be accepted should be the one with the higher NPV, i.e. Option 2.
NPV shows the absolute amount by which the project is forecast to increase shareholders' wealth and is
theoretically more sound than the IRR and MIRR. However, In this case, both IRR and MIRR back up the NPV.
The discounted payback period shows that Option II is more risky as it takes longer to recover the present value.

WORKINGS
W1: Net present value Year 0 Year 1 Year 2 Year 3 Year 4
Rs. in million
Outside Pak nominal cash flows
(W1.1) (2,252.25) 244.23 308.25 348.35 357.65
Pak nominal cash flows (10%
inflation) - 366.30 423.50 551.03 658.85
Total nominal cash flows (2,252.25) 610.53 731.75 899.38 1,016.50
Discount factor at 13% 1.000 0.885 0.783 0.693 0.613

Present value (2,252.25) 540.32 572.96 623.27 623.11

Net present value 107.41

W1.1: Nominal Cash flows in Rupees

Year 0 Year 1 Year 2 Year 3 Year 4

China (Rs. (2,252.25) (1,923) (2,199) (2,454) (2,432)

in million)
UAE (Rs. in - 2,161 2,490 2,773 2,749
million)
Rs. Net (2,252.25) 238 291 319 317
Cashflow at
current
prices
Rs. Net (2,252.25) 244.23 308.25 348.35 357.65
Nominal
Cash flow
at 3%

W2: Discounted Payback Period

Year 0 Year 1 Year 2 Year 3 Year 4

Present value (2,252.25) 540.32 572.96 623.27 623.11
of cash flow
(Rs. in m)
Cumulative (2,252.25) (1,711.93) (1,138.97) ( 515.70) 107.41
discounted
cash flow

Discounted Payback Period = Year before full recovery (3) + Unrecovered cost at start of the year (515.70)
Cashflow during the year (623.11)

Discounted payback period = 3.83 years

W3 : Internal rate of return
Year 0 Year 1 Year 2 Year 3 Year 4
in million
Nominal cash flows in (2,252.25) 610.53 731.75 899.38 1,016.5
million Rs. 0
Discount factor at 16% 1.000 0.862 0.743 0.641 0.552
Present value (2,252.25) 526.28 543.69 576.50 561.11
Net present value (44.67)
By Interpolation, the IRR is
15.11% P.A

W4 Modified Internal Rate of Return

PV ( Return Phase) (Year 1-4) 2359.66

PV (Investment Phase) (Year 0) 2252.25

Re 13%

MIRR = 14.3%