Capital Budgeting

Ques1. The ABC Ltd is in the process of selecting a capital project. The details of 2
Capital projects A and B identified by the company are provided below:

Project A Project B
Rate of Interest 12% 12%
Cost of Project -500000 -550000
Cash Inflows Year 1 400000 20000
Year 2 60000 500000
Year 3 50000 60000
Year 4 70000 70000
Year 5 80000 80000

You are required to

1. evaluate the above capital budgeting projects and recommend the project to be
implemented so that the company earns maximum profit on the basis of:
a. IRR Method
b. NPV Method using 12% Interest Rate
2. Calculate the value of NPV of “Project A” at the rate of interest of 10% to 15%
3. Draw a suitable chart for NPV of “Project A” at the rate of interest of 10% to
15%

Ques2. Given:

Data Description
10% Annual discount rate
-10,000 Initial cost of investment one year from today
3,000 Return from first year
4,200 Return from second year
6,800 Return from third year

Calculate the Net Present Value of this investment.

Ques3. Given:

Data Description
8% Annual discount rate. This might represent the rate of
inflation or the interest rate of a competing investment.
-40,000 Initial cost of investment
8,000 Return from first year
9,200 Return from second year
10,000 Return from third year
12,000 Return from fourth year
14,500 Return from fifth year

Calculate the Net Present Value of this investment.