If Bill Clinton was earning $8 million per year for the 3 years it took to write his book,

he would have earned ₹19.89

He would have lost the $10 million in advance payment so his net earning would have been

Once the book was published his eanrings would have been a declining perpeutity with a present value worth
But as his book would have been published after 3 years the pv at t0 would have been

So the net result form the two alternatives would have been (₹0.50) million
 ₹9.89

with a present value worth 12.5

₹9.39
CASH FLOW

NPV AT 10%
NPV AT 14%

IRR

IF THE DISCOUNT RATE GOES ABOVE 12.66% THE PROJECT TURNS FROM ACCEPT TO REJECT THAT IS FROM POSITIVE
EXAMINE THE CASH FLOWS

T0 T1 T2 T3 T4 T5

-200000 -200000 -200000 -200000 -200000

$169,482.24
($64,815.87)

12.6593%
T6 T7 T8 T9 T10 T11 T12 T13 T14 T15 T16

-200000 300000 300000 300000 300000 300000 300000 300000 300000 300000 300000
Let us look at the cash flows by creating a time line

t0 t1 t2 t3
cash flows -5000000 1000000 1000000 1000000
the NPV of the project at 6% will be
₹2,360,087.05
However alongwith this the service agreement requires an expense of 100000

value of service support 1666666.66666667

net value of the enterprise will ₹693,420.38

at 2% value will be -1017415

if we use the IRR method we are we are likely to find 2 IRRs

cash flow -5000000 900000 900000 900000

irr 9.60%

it appears that there will be 2 IRRs so IRR is not the appropriate method here to apply
t4 t5 t6 t7 t8 t9 t10
1000000 1000000 1000000 1000000 1000000 1000000 1000000

per year in perpetuity

900000 900000 900000 900000 900000 900000 -666666.667

LOOK AT THE TIMELINE OF THE CASH FLOWS FOR THIS PRODUCT

T0 T1 T2

CASH FLOW -250 20 20

DISCOUNT RATE
NPV
COST OF SUPPORT IN PERPETUITY
discount rate value perpetuity
0.02 250
0.05 100
0.08 62.5
0.1 50
0.12 41.6667
0.15 33.3333
0.18 27.7778
0.2 25
0.24 20.8333
0.28 17.8571
0.3 16.6667
0.4 12.5
0.5 10
0.8 6.25

AS YOU CAN SEE THERE IS NO IRR WHERE NPV BECOMES ZERO

SO WE CANNOT USE IRR HERE
T3 T4 T5 T6 T7 T8 T9 T10 t11 t12 t13

20 20 20 20 20 20 20 20 20 20 20

npv
($4,010.83)
($1,246.98)
($667.27)
($505.41)
($411.84)
($333.46)
($291.63)
($274.35)
($253.43)
($242.40)
($238.95)
($231.27)
($230.01)
($232.81)
14 t15 t16 t17 t18 t19 t20

20 20 20 20 20 20 20
CASH FLOWS AND TIME LINE

T0 T1 T2 T3 T4
CASH FLOWS -120 20 20 20 20
CLEANNG AND MAINTENANCE
TOTAL CASH FLOWS -120 20 20 20 20
NPV AT 8% ₹2.62

WHEN YOU EXAMINE THE CASH FLOWS YOU CAN SEE THE CASH FLOWS CHANGE SIGNS TWICE SO THIS PROJECT WO

SO THE IRR DECISION RULE WOULD BE INAPPROPRIATE FOR THIS PROJECT

IRR 8.54%
AS TEHERE ARE 2 NEGATIVE CASH FLOWS THERE MUST BE A SECOND IRR

SO IRR AS A TECHNIQUE HERE IS NOT RELIABLE

 T5 T6 T7 T8 T9 T10
20 20 20 20 20 20
-25
20 20 20 20 20 -5

IGNS TWICE SO THIS PROJECT WOULD HAVE 2 IRRS

 YEAR CASH FLOW
0 -100
1 15
2 15
3 15
4 15
5 15
6 15
7 15
8 15
9 15
10 15
11 15
12 15
13 15
14 15
15 15
16 15
17 15
18 15
19 15
20 15
21 -200
NPV AT 12% (₹6.47)

IRR 10.19%

NPV AT 0% ₹0.00
PRPOPOSAL IRR t0 t1 t2 t3
A 60% -100 30 153 88
B 55% ? 0 206 95
C 50% -100 37 0 204+?

PROJECT A NPV ₹119.83

FOR PROJECT B IRR IS 55% SO NPV AT 55% MUST BE ZERO
NPV AT 55% ₹111.26
SO CASH FLOW AT T0 MUST BE (₹111.26)

FOR PROJECT C NPV AT 50% FOR THE CASH FLOWS FROM TO TO T2 IS

SO TOTAL CASH FLOW IN T3 MUST BE 75.33 FOR NPV AT IRRRATE TO BE ZERO
FV OF CASH FLOW IN T3 IS
₹254.24

NPV OF PROJECT B IS ₹130.37

NPV OF PROJECT C IS ₹124.65
C CASH FLOW -100 37 0 254.24
(₹75.33)
PROJECT X
PROJECT Y

INCREMENTAL CASH FLOWS Y-X

Y SHOULD BE UNDERTAKEN FOR PROJECTS WITH DISCOUNT RATES BELOW 11.65% X FOR DISCOUNT RATES BETWEE

SO FOR A

FOR B

IF THE DISCOUNT RATE IS 7%

IF THE DISCOUNT RATE IS 7%
SO THE NPV RULE SAYS CHOOSE B WHILE THE IRR RULE SAYS CHOOSE A

USING THE INCREMENTAL IRR RULE

I HAVE NOT CONSIDERED THE INTITAL CASH OUTFLOW AS BOTH ARE THE SAME OTHERWISE I WOULD HAVE TAKEN
SO WE FIND THAT R =8%

THOUGH THE INITIAL INESTMENTS ARE THE SAME B HAS A LARGER CASH FLOW AS IT IS A GROWING PERPETUITY
SO BIIS THE BIGGER PROJECT
LOOK AT THE CASH FLOWS IN YEAR 18 ONWARDS

AS THE IRR IS 8% AND ABOVE THE DISCOUNT RATE OF 7% WE SHALL CHOOSE B

 T0 T1 T2 IRR
-30 20 20 21.53%
-80 40 60 15.14%

-50 20 40 11.65%

above 21.53%
 0.2
0.17
 T0 T1 T2 T3 IRR NPV
HUAWEI -20 20 20 20 83.93% ₹28.04
CISCO -100 60 60 60 36.31% ₹44.11

CISCO REVISED -20 -35 -35 -35

60 60 60
NET CASH FLOW -20 25 25 25 112% ₹40.05

THE REVISED BID SHOWS A HIGHER IRR AS THE INITIAL

HOWEVER, THE NPV OF THE REVISED BID IS SMALLER
INVESTMENT IS SMALLER
SO IT IS INFERIOR TO THE EARLIER BID
 COST TODAY DISCOUNT RATE SALE PRICE IN YEAR 5
MOUNTAIN RIDGE 3000000 15% 18000000
OCEAN PARK ESTATES 15000000 15% 75500000
LAKEVIEW 9000000 15% 50000000
SEABREEZE 6000000 8% 35500000
GREEN HILLS 3000000 8% 10000000
WEST RANCH 9000000 8% 46500000

T0 T1 T2 T3 T4
MOUNTAIN RIDGE -3000000 0 0 0 0
OCEAN PARK ESTATES -15000000 0 0 0 0
LAKEVIEW -9000000 0 0 0 0
SEABREEZE -6000000 0 0 0 0
GREEN HILLS -3000000 0 0 0 0
WEST RANCH -9000000 0 0 0 0

INVEST IN SEABREEZE WEST RANCH AND MOUNTAIN RIDGE

IF THE BUDGET WAS $12000000 PROFITABILITY INDEX FAILS

THEN CHOOSE MOUNTAIN RIDGE AND WEST RANCH
 PROFITABILITY
T5 NPV IRR INDEX
18000000 ₹5,949,181 43.10% 2.98
75500000 ₹22,536,844 38.16% 2.50
50000000 ₹15,858,837 40.91% 2.76
35500000 ₹18,160,703 42.70% 4.03
10000000 ₹3,805,832 27.23% 2.27
46500000 ₹22,647,119 38.88% 3.52
 NPV PER BUNCH COST PER BUNCH MAX BUNCHES
ROSES 3 20 25
LILIES 8 30 10
PANSIES 4 30 10
ORCHIDS 20 80 5

YOUR BUDGET IS 1000

SO BUY $300 OF LILIES $400 OF ORCHIDS $300 OF ROSES

THE BLUE AND RED ARE DIFFERENT WAYS OF COMPTUING PROFITABILITY INDEXES DEPENDING UPIN T

BLUE ONE COMPUTES PI AS NPV/INVESTMENT

RED ONE COMPUTES INVESTMENT AS CASH INLFOWS/ INVESTMENT

I DISCUSSED THE RED ONE IN CLASS

BUT AS YOU SEE BOTH THE VERSIONS GIVE YOU THE SAME RESULTS
 PROFITABILITY INDEX MAX INVESTMENT PROFITABILITY INDEX
0.15 500 1.15
0.266666666666667 300 1.26666667
0.133333333333333 300 1.13333333
0.25 400 1.25

ILITY INDEXES DEPENDING UPIN THE TEXT BOOK YOU READ