Tutorial on Capital Budgeting

1. A Project requires an outlay of Rs.50, 000 and yields annual cash inflow of
Rs.12, 500 for 7 years. Find the Average Rate of Return of the Project and
payback period.
2. A project costs Rs.8, 10, 000 and is expected to generate net cash inflow of
Rs.5,00,000, Rs.3, 50, 000 and Rs.3, 00, 000 over its life of three years.
Calculate Internal Rate of Return of the Project.
3. A machine will cost Rs.5,00 ,000 and will provide annual net cash inflow of
Rs.1,50,000 for six years. The cost of capital is 15%. Calculate the machine
Net Present Value
4. A Project requires an outlay of Rs. 1, 50, 000 and yields annual cash inflow
of Rs.40, 000 for 10 years. Find the Pay Back Period of the project
5. A machine will cost Rs.1, 00, 000 and will provide net cash inflow of Rs.30,
000 for 6 years. The cost of capital is 15 percent. Calculate the Net Present
Value of the machine. Also find the Internal Rate of Return of the Project.
Should the Machine is to be purchased
6. Mr. X wishes to determine the present value of an annuity consisting of cash
inflows of Rs.1000 per year for 5 years. The rate of interest he can earn from
his investment is 10 percent
7. Mr. Y wishes to determine the present value of an annuity consisting of cash
inflows of Rs.5000 per year for 6 years. The rate of interest he can earn from
his investment is 12 percent.
8. Matrix Associates is evaluating a project whose expected cash flows are as
follows:
Year Cash flow (Rs. in million)
0 (23)
1 6
2 8
3 9
4 7
The cost of capital for Matrix Associates is 14 percent.(i) What is the NPV of
the project
9. Sigma Corporation is evaluating a project whose expected cash flows are as
follows:
Year Cash flow (Rs.in million)
0 - 16.0
1 3.2
 Tutorial on Capital Budgeting

2 4.5
3 7.0
4 8.4
The cost of capital for Sigma Corporation is 12 percent.(i) What is the NPV
and IRR of the project?
10.Dumas Company is evaluating a project whose expected cash flows are as
follows:
Year Cash flow
5 - Rs.700,000
6 Rs.150,000
7 Rs.200,000
8 Rs.300,000
9 Rs.350,000
The cost of capital for Dumas Company is 12 percent . (i)What is the NPV of
the project?
11.The cash flows associated with an investment are given below:
Year Cash flow
0 Rs.(850,000)
1 120,000
2 450,000
3 360,000
4 210,000
5 130,000
Calculate the of this investment, if the discount rate is 12 percent.
12. Your company is considering two mutually exclusive projects, A and B.
Project A involves an outlay of Rs.250 million which will generate an
expected cash inflow of Rs.60 million per year for 8 years. Project B calls
for an outlay of Rs.100 million which will produce an expected cash inflow
of Rs.25 million per year for 8 years. The company's cost of capital is 14
percent.

a. Calculate the NPV and IRR of each project

 Tutorial on Capital Budgeting

13. Your company is considering two projects, M and N. Each of which

requires an initial outlay of Rs.240 million. The expected cash inflows from
these projects are:
Yea Project M Project N
1 85 100
2 120 110
3 180 120
4 100 90
a. What is the payback period for each of the projects?
b. What is the discounted payback period for each of the projects if the cost
of capital is 15 percent?
c. If the two projects are independent and the cost of capital is 15 percent,
which project (s) should the firm invest in?
14.If an equipment costs Rs.350,000 and lasts 6 years, what should be the
minimum annual cash inflow before it is worthwhile to purchase the
equipment ? Assume that the cost of capital is 12 percent