Unit 1 - Investment Decisions and Risk Analysis

Method Risk Adjusted Cut off Rate
Under this method, the cut off rate or minimum required rate of return
capital] is raised by adding what is called ‘risk premium’ to it. When the
Description to be added would be greater.
Advantages
It is Simple to calculate and easy to understand
It considers time value of money
It incorporates risk by adding risk premium to risk free rate
Disadvantages
Determination of Risk Adjusted Cut off Rate is a difficult task
It does not adjust the cash flows
The process of adding the Risk Premium to the cut off rate leads to a compounding of r
Use of different discount rates for different projects or for the same project over differ
Illustration 1
The Beta company Ltd. Is considering the purchase of a new investment. Two alternativ
Cash inflows are expected to be as follows.
Year Cash Inflow Cash Inflow
A B
1 40,000 50,000
2 35,000 40,000
3 25,000 30,000
4 20,000 30,000
The Company has a target return on capital at 10%. Risk Premium Rates are 2% and 8%
Solution:
Risk Adjusted Cut off Ra 0.12
Risk Adjusted Cut off Ra 0.18
Calculation of Net Present Value

PV Factor PV Factor
10% + 2% = 10% + 8%
Year Cash Inflows PV of A Cash Inflows PV of A
10% + 2% = 10% + 8%
Year 12% Cash Inflows PV of A = 18% Cash Inflows PV of A
A B
1 0.893 40,000 35,720 0.847 50,000 42,350
2 0.797 35,000 27,895 0.718 40,000 28,720
3 0.712 25,000 17,800 0.609 30,000 18,270
4 0.636 20,000 12,720 0.516 30,000 15,480
Total PV of Cash inflows 94,135 104,820
Total PV of Cash Outflows 100,000 100,000
Net Present Value -5,865 4,820
required rate of return [mostly the firm’s cost of
emium’ to it. When the risk is greater, the premium
to a compounding of risk over time but risk does not necessarily increase with time
ame project over different years involves subjectivity
estment. Two alternative investments are available A and B each costing Rs. 100,000.
m Rates are 2% and 8% respectively for investments A and B. which investment should be prefe
1/(1+r)^n
with time
s. 100,000.
ment should be preferred?

Method Certainty Equalent Method
The certainty equivalent is the guaranteed amount of cash that would yield
exact expected utility as a given risky asset with absolute certainty. It can be
by multiplying the expected cash flows by certainty equivalent co-efficient a
the uncertain cash inflows to certain cash inflows.
Description
Advantages
It is Simple to calculate and easy to understand
It considers time value of money
It incorporates risk by converting riskly cash flows into certain cash flows
Certainty equivalent co-efficient may be different for different years.
Disadvantages
Determination of Certainty equivalent co-efficient is a difficult task
Determination of Certainty equivalent co-efficient involves subjectivity
It does not directly use the probability distribution of possible cash flows
Solution:
X Y
Cash outflo 40000 40000
Ko 10% 10%
Calcualtion of Certain cash Inflows

X Y
Certainty Certain Certainty Certain
Cash Co- Cash Cash Co- Cash
Year Inflows efficent Inflows Inflows efficent Inflows
1 25000 0.8 20000 20000 0.9 18000
2 20000 0.7 14000 30000 0.8 24000
3 20000 0.9 18000 20000 0.7 14000
Calculation of NPV
X Y
PV of PV of
Certain Certain Certain Certain
Cash Cash Cash Cash
Year PV Factor Inflows Inflows Inflows Inflows
1 0.909 20000 18180 18000 16362
2 0.826 14000 11564 24000 19824
3 0.751 18000 13518 14000 10514
Total PV of Cash Inflows 43262 46700
Totoal Cash Outflows 40000 40000
Net Present Value 3262 6700
Conclusions
Project Y is preferrable as the NPV of Project Y is more than NPV of Project X.
Calculation of Net Present value

Certainty Certain PV of
Cash Eq Co- Cash PV Factor Cash
Year Inflows Efficients Inflows @7% Inflows
1 90000 0.8 72000 0.935 67320
2 80000 0.6 48000 0.873 41904
3 70000 0.7 49000 0.816 39984
4 65000 0.8 52000 0.763 39676
5 45000 0.9 40500 0.713 28877
Total PV of Cash Inflows 217761
Less: Total of Cash outflows 110000
Net present value 107761
Conclusion:
The project may be accepted as the Net present value is positive
Calculation of NPV of Project A Calculation of NPV of P
PV of
Certainty Cetain Certain
Cash Eq Co- Cash PV Factor Cash Cash
Year Flows efficients Inflows @ 5% inflows Year Flows
1 100000 0.8 80000 0.952 76160 1 100000
2 120000 0.7 84000 0.907 76188 2 120000
3 150000 0.5 75000 0.864 64800 3 200000
Total PV of Certain Cash inflows 217148 Total PV of Certain Cash
less: Initial Cash outflows 200000 less: Initial Cash outf
NPV 17148 NPV
Conclusions:
a) Project B is preferable as the NPV of Project B is greater than Project A
b) Project A is More risky when compared to Project B as the NPV of Project A is less than that of Project B
Solution
Cash Outflows 50000
Cut off Rate 15%
Calculation of Certain Cash Inflows

Year Project A Project B
Cetainty Certain Cetainty Certain
Co- Cash Cash Co- Cash
Cash Inflo efficient flows Inflows efficient flows
1 30000 0.8 24000 40000 0.9 36000
2 40000 0.9 36000 20000 0.8 16000
3 20000 0.7 14000 30000 0.7 21000
4 15000 0.9 13500 10000 0.6 6000
Calculation of Net Present Value
PV opf PV of
Certain Certain
Certain Cash Certain Cash
Cash inflows Cash inflows
Year PV Factor flows (A) (A) flows (B) (B)
1 0.870 24000 20880 36000 31320
2 0.756 36000 27216 16000 12096
3 0.658 14000 9212 21000 13818
4 0.572 13500 7722 6000 3432
Total of Certain Cash Inflows 65030 60666
Less: initial Cash Outflows 50000 50000
NPV 15030 10666
Conclusion:
Project A is Preferable as the NPV of Project A is greater than Project B
that would yield the same
ertainty. It can be employed
lent co-efficient as to convert
Project Certainty Eq Co-Ef

Cash Inflows 1 10000 50% 0.5 5000
- Cash Outflows 20000 0.3
NPV 20000 0.3
40000 0.1
Calculation of NPV of Project B
PV of
Certainty Cetain Certain
Eq Co- Cash PV Factor Cash
efficients Inflows @ 5% inflows
0.9 90000 0.952 85680
0.8 96000 0.907 87072
0.7 140000 0.864 120960
Total PV of Certain Cash inflows 293712
less: Initial Cash outflows 225000
NPV 68712
n that of Project B
PV Factor PV Cash Inflows
Method Sensitivity Technique
This method expresses risk in more precise terms. When cash inflows
under different circumstances; more than one forecast of cash inflow
Description 1. Optimistic
2. Most Likely
3. Pessimistic
Advantages
It gives greater visibility to the weak spots in an investment.
It will help management to more critically investigate such factors to validate the assum
It aids management in proper decision-making.
Disadvantages
Variables are often interdependent, which makes examining them each individually un
The analysis is based on using past data/experience which may not hold in future.
Assigning a maximum and minimum or optimistic and pessimistic value is open to subje
It is neither risk-measuring nor a risk-reducing technique. It does not produce any clear
Projects A B
Cost on investment 50000 50000 Year CI
forcast of CI p.a for 5 Years 1 30000
Optimistic 30000 40000 2 30000
Most likely 20000 20000 3 30000
Pessimistic 15000 5000 4 30000
Cut off rate 15% 5 30000
Annuity Factor @15% 3.352
Calculation of NPV for Project A
Investme
Annual Annuity PV of nt/ Initial
Cash Factor Cash Cash
Flows @15% Flows Outflows NPV
Optimistic 30000 3.352 100560 50000 50560 Optimistic
Most likely 20000 3.352 67040 50000 17040 Most likely
Pessimistic 15000 3.352 50280 50000 280 Pessimistic
Conclusion
The NPV in Project B is greater than Project A under Optimistic situation however, Project B ends up in Losses under Pesimistic
consider that Project B is more Risky when compared to Project A. The preference of the Poject would depend on Mr. Rajus' A
would offord to take higher risk, then he would select Project B.
Projects A B
Cash Outflows 60000 60000
n 5
Cash Inflows
O 40000 30000
M 25000 30000
P 20000 10000
Cut off Rate 15%
Project ?
Solutions
Calculation of NPV for Project A
Present Investme
Annual Annuity Value nt/ Initial Net
cash Factor @ cash Cash Present
Inflows 15% inflows Outflows value
O 40000 3.352 134080 60000 74080 O
M 25000 3.352 83800 60000 23800 M
P 20000 3.352 67040 60000 7040 P
Conclusion :
Project A is preferable as the NPV of Project A under Optimistic situation and Pessimistic situation are Greater when compared
ending up in Losses in Pessimistic Situation.
ms. When cash inflows are very sensitive
forecast of cash inflows may be made;
ors to validate the assumptions.
em each individually unrealistic. For example, change in selling price will effect change in sales v
not hold in future.
tic value is open to subjective interpretation and risk preference of the decision-maker.
s not produce any clearer decision rule.
Years 1% 2% 3% 4% 5% 6% 7% 8%
1
2
3
4
5
6
7
Calculation of NPV for Project B
Investme
Annual Annuity PV of nt/ Initial
Cash Factor Cash Cash
Flows @15% Flows Outflows NPV
40000 3.352 134080 50000 84080
20000 3.352 67040 50000 17040
5000 3.352 16760 50000 -33240
ends up in Losses under Pesimistic situation. Therefore we
ect would depend on Mr. Rajus' Attitude towards risk. If he
Calculation of NPV for Project B
Present Investme
Annual Annuity Value nt/ Initial Net
cash Factor @ cash Cash Present
Inflows 15% inflows Outflows value
30000 3.352 100560 60000 40560
30000 3.352 100560 60000 40560
10000 3.352 33520 60000 -26480
ation are Greater when compared to Project B, where project is

ffect change in sales volume.
sion-maker.
9% 10% 11% 12% 13% 14% 15% 16% 17%
3.352
Method Probability Technique
A probability is the relative frequency with which an event

may occur in the future. When future estimates of cash
Descriptioninflows have different probabilities the expected monetary
values may be computed by multiplying cash inflows with
the probabilities assigned.
Advantages
It does not result in compounding of risk over time.
It helps in determining the probability of project that whether it provides a NPV of less
It provides a quantifiable measure of risk i.e., standard deviation.
Probabilities can be determined for each year seperately.
Disadvantages
It involves lot of estimation; probabilities for cash flows are estimated for each year in
Information may be biased.
there are a lot of tedious calculations involved in it
Calculation of Net Present Value.

Project X Project Y
PV Factor Cash Cash
Years @ 10% Inflows Prob. EMV PV Inflows Prob. EMV PV
1 0.909 40000 0.2 8000 7272 80000 0.2 16000 14544
2 0.826 80000 0.6 48000 39648 90000 0.6 54000 44604
3 0.751 120000 0.2 24000 18024 90000 0.2 18000 13518
Total Present Value 64944 Total Present Value 72666
Less initial Cash outflows 60000 Less initial Cash outflows 60000
Net Present Value 4944 Net Present Value 12666
Conclusion:
As Net Present value of Project Y is greater than project X after considering the Probabilities, therefore Project Y is preferable
Solution:
Calculation of EMV
Project X Project Y
Cash Cash
Possible Events Inflows Prob. EMV Inflows Prob. EMV
A 40000 0.10 4000 120000 0.10 12000
B 50000 0.20 10000 100000 0.15 15000
C 60000 0.40 24000 80000 0.50 40000
D 70000 0.20 14000 60000 0.15 9000
E 80000 0.10 8000 40000 0.10 4000
Total EMV 60000 80000
Conclusion
Project Y is preferable as EMV of Project Y is greater when compared to Project X
Calculation of EMV
I Year II Year III Year
Cash Inflows Prob. EMV Cash Inflo Prob. EMV Cash Inflo Prob. EMV
2000 0.1 200 2000 0.2 400 2000 0.1 200
3000 0.2 600 3000 0.3 900 3000 0.6 1800
4000 0.3 1200 4000 0.2 800 4000 0.2 800
5000 0.4 2000 5000 0.3 1500 5000 0.1 500
Total EMV 4000 3600 3300
Calculation of Present value

PV of
PV Factor Cash
Year EMV @ 10% Flows
I 4000 0.909 3636
II 3600 0.826 2973.6
III 3300 0.751 2478.3
Total PV 9087.9
Conclusion:
The Present of EMV at 10% is Rs. 9087.9
Calculation of NPV
Project X Project Y
PV Factor Cash Cash
Year @ 12% Inflows Prob. EMV PV Inflows Prob. EMV PV
1 0.893 5000 0.20 1000 893 7000 0.20 1400 1250.2
2 0.797 10000 0.40 4000 3188 9000 0.50 4500 3586.5
3 0.712 13000 0.20 2600 1851.2 11000 0.15 1650 1174.8
4 0.636 15000 0.20 3000 1908 13000 0.15 1950 1240.2
Total Present Value 7840.2 7251.7
Less: Initial cash Outflow/ Investment 6000 6000
Net Present value 1840.2 1251.7
Conclusion:
Project X is preferable as Net present value after considering the Probability is higher when compared to project Y
des a NPV of less than or greater than the specified amount.
for each year in a project
e Project Y is preferable
to project Y
Method Standard deviation Method
Standard deviation is the most comm
Description Unlike the range, it considers every po
probability is
assigned to each event.
Advantages
It provides a quantifiable measure of risk i.e., standard deviation.
Calculation of Combined standard deviation is possible
Variability of the project can be assessed with CV; which is based on Standard deviation
Disadvantages
there are a lot of tedious calculations involved in it
It gives more weight to extreme items and less to those which are near the mean.
Problem:
From the following information ascertain which project is more risky on the basis of Standard Deviation.
Project A Project B
Cash
Cash Inflows Prob. Inflows Prob.
2000 0.2 2000 0.1
4000 0.3 4000 0.4
6000 0.3 6000 0.4
8000 0.2 8000 0.1
Solution:
Calculation of SD of Project A
Deviation
from the Sq of
Cash Inflows Prob mean Deviation
(X) (f) f*X (d) 𝑑^2 𝑓𝑑^2
2000 0.2 400 -3000 9000000 1800000
4000 0.3 1200 -1000 1000000 300000
6000 0.3 1800 1000 1000000 300000
8000 0.2 1600 3000 9000000 1800000
1 5000 4200000
Mean 5000
Mean = 𝝈=√((∑128▒ 〖𝒇𝒅 ^𝟐 〗 )/𝒏) 2049.39
(∑128▒𝑭𝑿)
/𝒏
Mean =
(∑128▒𝑭𝑿)
Note 1 /𝒏
Standard Deviation for Project A is 2049.39
Calculation of SD of Project B
Deviation
from the Sq of
Cash Inflows Prob mean Deviation
(X) (f) f*X (d) 𝑑^2 𝑓𝑑^2
2000 0.1 200 -3000 9000000 900000
4000 0.4 1600 -1000 1000000 400000
6000 0.4 2400 1000 1000000 400000
8000 0.1 800 3000 9000000 900000
1 5000 2600000
Mean 5000
1612.452
Note 2
SD of Project B is 1612.45
Conclusion:
Since the SD of Project A is higher when compared with Project B, therefore Project A is more Risky.
Solutions
Calculation of Stardard deviation of Project X
Project X
Deviation
from Sq of
Possible events Cash Inflows Prob. Mean deviations
x f fx d 𝑑^2 𝑓𝑑^2
A 4000 0.1 400 -2000 4000000
B 5000 0.2 1000 -1000 1000000
C 6000 0.4 2400 0 0
D 7000 0.2 1400 1000 1000000
E 8000 0.1 800 2000 4000000
n=1 6000
𝝈=√((∑128▒ 〖𝒇𝒅 ^𝟐 〗 )/𝒏) Mean = sum (fx)/n 6000/1
Mean = 6000
Mean =
Std Dev. For Project X 1095.45
(∑128▒𝑭𝑿)
Std Dev. For Project Y 2097.61
/𝒏
Comclusion:
The Std. Dev of Project Y is greater than that of Project X. Therefore Project Y is more risky.
Std. Dev of X 3794.73

Std. Dev of Y 4449.72
CV= Std. Dev/ Mean *100
𝑪𝒗=𝝈/𝒙 ̅ ×𝟏𝟎𝟎
Project X Project Y
Cv = (3794.73/9000) x 100 CV = (4449.72/9000 )x 100
42.16% 49.44%
Conclusion:
Since the CV of Project X is less when compared to Project Y, Project X is considered to be more consistent in terms of Estimat
ation Method
ation is the most common quantitative measure of risk of an Asset.
ge, it considers every possible events and weight equal to its
ch event.
ed on Standard deviation.
are near the mean.
d Deviation.
𝑓𝑑^2
400000
200000
0
200000
400000
1200000
Mean =
(∑128▒𝑭𝑿)
/𝒏
ore consistent in terms of Estimated NPV when compared to project Y
Method Co-efficient of variation Method
A coefficient of variation (CV) is a statistical measure of the dispersion of d

data series around the mean. It is calculated as follows: (standard deviatio
Description value). The coefficient of variation represents the ratio of the standard
deviation to the mean, and it is a useful statistic for comparing the degree
from one data series to another, even if the means are drastically differen
another.
𝑪𝒗=𝝈/𝒙 ̅ ×𝟏𝟎𝟎
Problem:
Using the below figures, compute the co-effcient of variations and suggest which proposal should be accepted.
Project X Project Y
Std. Dev 1095.45 2097.61
Mean 6000 8000
Solution:
Cv for project X 0.182575

18.26 %
CV of Project Y 0.262201
26.22 %
Conclusion:
CV of Project Y is more when compared to project X; which means Project Y is more risky. Therefore Project X should accepted
Problem:
Using the below figures, compute the CV and suggest which proposal should be accepted.
Project A Project B
Std. Dev 2049.39 1612.45
Mean 5000 5000
Solution
A = 40.98%
B = 32.24%
Problem:
e of the dispersion of data points in a
ows: (standard deviation) / (expected
atio of the standard
comparing the degree of variation
are drastically different from one
uld be accepted.
refore Project X should accepted.

Method Decision Tree Analysis
A decision tree is a schematic, tree-shaped diagram used to determin

statistical probability.Each branch of the decision tree represents a p
reaction. The tree is structured to show how and why one choice ma
branches indicating each option is mutually exclusive.
Description
Problem:
Mr. Innocent is considering an investment proposal of Rs. 20000. The returns during the life of the investment are as under:-
Year -1
Events Cash Flows Prob.
i 8000 0.3 a
ii 12000 0.5 b
iii 10000 0.2 c
Year -2
CF of Year 1 8000 12000 10000
Events Cash Inflows Prob. Cash Inflo Prob. Cash Inflo
i 15000 0.2 20000 0.1 25000
ii 20000 0.6 30000 0.8 40000
iii 25000 0.2 40000 0.1 60000
Using 10% as cost of Capital advise the acceptability of the proposal
Solution:
Calculation of NPV of cash inflows
Discounting rate/ PV
Events Cash Flows factor @ 10% PV of cash flow
Year 1 Year 2 Year 1 Year 2 Year 1
ai 8000 15000 0.909 0.826 7272
ii 8000 20000 0.909 0.826 7272
iii 8000 25000 0.909 0.826 7272
bi 12000 20000 0.909 0.826 10908
ii 12000 30000 0.909 0.826 10908
iii 12000 40000 0.909 0.826 10908
c i 10000 25000 0.909 0.826 9090
ii 10000 40000 0.909 0.826 9090
iii 10000 60000 0.909 0.826 9090
Decision Tree Ananlysis

Year (0) Year 1 Year 2
Prob. Cash Inflows Prob. Cash Inflows NPV
1 2 3 4 5
0.2 15000 -338
0.3 8000 0.6 20000 3792
0.2 25000 7922
Cash Outflow Rs. 20000
0.1 20000 7428
0.5 12000 0.8 30000 15688
0.1 40000 23948
0.2 25000 9740

0.2 10000 0.5 40000 22130
0.3 60000 38650
Total NPV
Conclusion;
As the proposal yeilds positive NPV which is 13,903.2 at a discounting factor of 10%, the proposal may be accepted.
Problem:
A company has the following estimates of the present values of the future cash flows after taxes associated with the investme
It tends to use a decision- tree approach to get a clear picture of the possible outcomes of this investment. the plant expansio
future cash flows and probabilities are as follows:
With Expansion Without expansion Probabilities

300,000 200,000 0.2
500,000 200,000 0.4
900,000 350,000 0.4
Advise the company regarding the financial feasibility of the project.
Solution;
Decision Tree Ananlysis
Year 1 Prob. PV of Futu Expected PV

With Expansion
0.2 300,000 60000
300,000 0.4 500,000 200000
0.4 900,000 360000
Total PV of Expected cash flows 620000
Less: Total of Cash outflows 300000
Decision tree NPV 320000
0.2 200,000 40000

Without expansion 0.4 200,000 80000
0.4 350,000 140000
Total PV of Expected cash flows 260000
Less: Total of Cash outflows Nil
NPV 260000
Conclusion:
The expected NPV with plant expansion is Rs. 3,20,000 and without expansion is Rs. 2,60,000. Therefore, the company is advis
agram used to determine a course of action or show a
ion tree represents a possible decision, occurrence or
and why one choice may lead to the next, with the use of the
xclusive.
of the investment are as under:-
1st year 2nd Year

1
1 2
3
1
2 2
10000 3
Prob. 1
0.2 3 2
0.5 3
0.3
PV of cash flow
Year 2 Total NPV
12390 19662 -338
16520 23792 3792
20650 27922 7922
16520 27428 7428
24780 35688 15688
33040 43948 23948
20650 29740 9740
33040 42130 22130
49560 58650 38650
Join Prob. Expected NPV

1x3 5x1x3
0.06 -20.28
0.18 682.56
0.06 475.32
0.05 371.4
0.4 6275.2
0.05 1197.4
0.04 389.6
0.1 2213
0.06 2319
1 13903.2
posal may be accepted.
xes associated with the investment proposal, concerned with expanding the plan capacity.
is investment. the plant expansion is expected to cost Rs. 3,00,000. the respective PVs of
. Therefore, the company is advise to expand the plant capacity
Present Value Annuity Factor Table
Y/I 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736
3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487
4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170
5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791
6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355
7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868
8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335
9 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759
10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145
11 10.368 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495
12 11.255 10.575 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814
13 12.134 11.348 10.635 9.986 9.394 8.853 8.358 7.904 7.487 7.103
14 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.367
15 13.865 12.849 11.938 11.118 10.380 9.712 9.108 8.559 8.061 7.606
16 14.718 13.578 12.561 11.652 10.838 10.106 9.447 8.851 8.313 7.824
17 15.562 14.292 13.166 12.166 11.274 10.477 9.763 9.122 8.544 8.022
18 16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.372 8.756 8.201
19 17.226 15.678 14.324 13.134 12.085 11.158 10.336 9.604 8.950 8.365
20 18.046 16.351 14.877 13.590 12.462 11.470 10.594 9.818 9.129 8.514
21 18.857 17.011 15.415 14.029 12.821 11.764 10.836 10.017 9.292 8.649
22 19.660 17.658 15.937 14.451 13.163 12.042 11.061 10.201 9.442 8.772
23 20.456 18.292 16.444 14.857 13.489 12.303 11.272 10.371 9.580 8.883
24 21.243 18.914 16.936 15.247 13.799 12.550 11.469 10.529 9.707 8.985
25 22.023 19.523 17.413 15.622 14.094 12.783 11.654 10.675 9.823 9.077
26 22.795 20.121 17.877 15.983 14.375 13.003 11.826 10.810 9.929 9.161
27 23.560 20.707 18.327 16.330 14.643 13.211 11.987 10.935 10.027 9.237
11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528
2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106
3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589
3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991
4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326
4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605
5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837
5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031
5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192
6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327
6.492 6.194 5.918 5.660 5.421 5.197 4.988 4.793 4.611 4.439
6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533
6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611
7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675
7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730
7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775
7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812
7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843
7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870
8.075 7.562 7.102 6.687 6.312 5.973 5.665 5.384 5.127 4.891
8.176 7.645 7.170 6.743 6.359 6.011 5.696 5.410 5.149 4.909
8.266 7.718 7.230 6.792 6.399 6.044 5.723 5.432 5.167 4.925
8.348 7.784 7.283 6.835 6.434 6.073 5.746 5.451 5.182 4.937
8.422 7.843 7.330 6.873 6.464 6.097 5.766 5.467 5.195 4.948
8.488 7.896 7.372 6.906 6.491 6.118 5.783 5.480 5.206 4.956
8.548 7.943 7.409 6.935 6.514 6.136 5.798 5.492 5.215 4.964
21% 22%
0.826 0.820 #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0!
Present Value table
n/i 1% 2% 3% 4% 5% 6% 7%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935
2 0.980 0.961 0.943 0.925 0.907 0.890 0.873
3 0.971 0.942 0.915 0.889 0.864 0.840 0.816
4 0.961 0.924 0.888 0.855 0.823 0.792 0.763
5 0.951 0.906 0.863 0.822 0.784 0.747 0.713
6 0.942 0.888 0.837 0.790 0.746 0.705 0.666
7 0.933 0.871 0.813 0.760 0.711 0.665 0.623
8 0.923 0.853 0.789 0.731 0.677 0.627 0.582
9 0.914 0.837 0.766 0.703 0.645 0.592 0.544
10 0.905 0.820 0.744 0.676 0.614 0.558 0.508
11 0.896 0.804 0.722 0.650 0.585 0.527 0.475
12 0.887 0.788 0.701 0.625 0.557 0.497 0.444
13 0.879 0.773 0.681 0.601 0.530 0.469 0.415
14 0.870 0.758 0.661 0.577 0.505 0.442 0.388
15 0.861 0.743 0.642 0.555 0.481 0.417 0.362
16 0.853 0.728 0.623 0.534 0.458 0.394 0.339
17 0.844 0.714 0.605 0.513 0.436 0.371 0.317
18 0.836 0.700 0.587 0.494 0.416 0.350 0.296
19 0.828 0.686 0.570 0.475 0.396 0.331 0.277
20 0.820 0.673 0.554 0.456 0.377 0.312 0.258
21 0.811 0.660 0.538 0.439 0.359 0.294 0.242
22 0.803 0.647 0.522 0.422 0.342 0.278 0.226
23 0.795 0.634 0.507 0.406 0.326 0.262 0.211
8% 9% 10% 11% 12% 13% 14% 15% 16% 17%
0.926 0.917 0.909 0.901 0.893 0.885 0.877 0.870 0.862 0.855
0.857 0.842 0.826 0.812 0.797 0.783 0.769 0.756 0.743 0.731
0.794 0.772 0.751 0.731 0.712 0.693 0.675 0.658 0.641 0.624
0.735 0.708 0.683 0.659 0.636 0.613 0.592 0.572 0.552 0.534
0.681 0.650 0.621 0.593 0.567 0.543 0.519 0.497 0.476 0.456
0.630 0.596 0.564 0.535 0.507 0.480 0.456 0.432 0.410 0.390
0.583 0.547 0.513 0.482 0.452 0.425 0.400 0.376 0.354 0.333
0.540 0.502 0.467 0.434 0.404 0.376 0.351 0.327 0.305 0.285
0.500 0.460 0.424 0.391 0.361 0.333 0.308 0.284 0.263 0.243
0.463 0.422 0.386 0.352 0.322 0.295 0.270 0.247 0.227 0.208
0.429 0.388 0.350 0.317 0.287 0.261 0.237 0.215 0.195 0.178
0.397 0.356 0.319 0.286 0.257 0.231 0.208 0.187 0.168 0.152
0.368 0.326 0.290 0.258 0.229 0.204 0.182 0.163 0.145 0.130
0.340 0.299 0.263 0.232 0.205 0.181 0.160 0.141 0.125 0.111
0.315 0.275 0.239 0.209 0.183 0.160 0.140 0.123 0.108 0.095
0.292 0.252 0.218 0.188 0.163 0.141 0.123 0.107 0.093 0.081
0.270 0.231 0.198 0.170 0.146 0.125 0.108 0.093 0.080 0.069
0.250 0.212 0.180 0.153 0.130 0.111 0.095 0.081 0.069 0.059
0.232 0.194 0.164 0.138 0.116 0.098 0.083 0.070 0.060 0.051
0.215 0.178 0.149 0.124 0.104 0.087 0.073 0.061 0.051 0.043
0.199 0.164 0.135 0.112 0.093 0.077 0.064 0.053 0.044 0.037
0.184 0.150 0.123 0.101 0.083 0.068 0.056 0.046 0.038 0.032
0.170 0.138 0.112 0.091 0.074 0.060 0.049 0.040 0.033 0.027
18% 19% 20%
0.847 0.840 0.833
0.718 0.706 0.694
0.609 0.593 0.579
0.516 0.499 0.482
0.437 0.419 0.402
0.370 0.352 0.335
0.314 0.296 0.279
0.266 0.249 0.233
0.225 0.209 0.194
0.191 0.176 0.162
0.162 0.148 0.135
0.137 0.124 0.112
0.116 0.104 0.093
0.099 0.088 0.078
0.084 0.074 0.065
0.071 0.062 0.054
0.060 0.052 0.045
0.051 0.044 0.038
0.043 0.037 0.031
0.037 0.031 0.026
0.031 0.026 0.022
0.026 0.022 0.018
0.022 0.018 0.015

Unit 1 - Investment Decisions and Risk Analysis

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Unit 1 - Investment Decisions and Risk Analysis

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Method Risk Adjusted Cut off Rate

Calculation of Net Present Value

ment should be preferred?

Calcualtion of Certain cash Inflows

Calculation of Net Present value

Calculation of NPV of Project A Calculation of NPV of P

Calculation of Certain Cash Inflows

Calculation of Net Present Value

Project Certainty Eq Co-Ef

Calculation of NPV for Project A

ors to validate the assumptions.

Calculation of NPV for Project B

Calculation of NPV for Project B

ation are Greater when compared to Project B, where project is

9% 10% 11% 12% 13% 14% 15% 16% 17%

A probability is the relative frequency with which an event

Calculation of Net Present Value.

Calculation of Present value

for each year in a project

Mean = 𝝈=√((∑128▒ 〖𝒇𝒅 ^𝟐 〗 )/𝒏) 2049.39

Calculation of Stardard deviation of Project X

Std. Dev of X 3794.73

CV= Std. Dev/ Mean *100

are near the mean.

A coefficient of variation (CV) is a statistical measure of the dispersion of d

Cv for project X 0.182575

refore Project X should accepted.

A decision tree is a schematic, tree-shaped diagram used to determin

Using 10% as cost of Capital advise the acceptability of the proposal

Decision Tree Ananlysis

0.2 25000 9740

With Expansion Without expansion Probabilities

Advise the company regarding the financial feasibility of the project.

Decision Tree Ananlysis

Year 1 Prob. PV of Futu Expected PV

0.2 200,000 40000

of the investment are as under:-

1st year 2nd Year

Join Prob. Expected NPV

posal may be accepted.

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