CORPORATE FINANCE NOTES

Future Value = pv * (1+r) ^n

Doubling Period = 72/Interest Rate
Doubling Period= 0.35 + 69/Rate
FVIFA=((1+r) ^n – 1)/ r
FV = Annuity * FVIFA

Q.1)
Annuity Amount = Rs.30000
N= 30 years
R= 11%
FVIFA = (1+11) ^30 = 30000 + 199.021 = 30199.021

Q.2)
N=5
FV=2 MILLION
R=12% Compound return
2000000 = X * 6.35
X= 314812

Q.3)
FV= 500 Million
N= 6
R=14%
Annuity= x
500000000= X * (1+14) ^6
X = 500000000/8.53 = 58.575 Million
Q.4)
FV= 8000
N=6
ANNUITY=1000
R=?
FV=A * FVIFA
FVIFA= 8000/1000= 8 (Check the FVIFA table and locate for the closest r value of 8)
So, R= 12%

BENEFIT COST RATIO= Present Value of Cash Inflows / Initial Investment

NET BCR = Net present value/ Initial Investment
OR
NET BCR = BCR – 1
NPV = Present Value of Cash Flows – Initial Investment(I)

DECISION RULE:

 BCR > 1 (ACCEPT)

 BCR < 1 (REJECT)
 NBCR > 0 (ACCEPT)
 NBCR < 0 (REJECT)

INTERNAL RATE OF RETURN (IRR): Discount rate is not given for the given Cash inflow and
outflow. So, we have to find the IRR. IRR= The rate at which the present value of cash inflow is
equal to the present value of cash outflow. In this case NPV is 0. The discount rate at which NPV
is zero is IRR.
USE TRIAL AND ERROR METHOD to find at which rate PV of Cash Outflow=PV of cash inflow.
Ct / (1+r) t - Co = 0
R value increases, present value decreases.
If the calculated PV of the expected cash inflow is lower than the pv of cash outflows, a lower
rate should be tried.