Pay Back

A project’s payback period is found by counting the number o

cumulative cash flow equals the initial investment.

Cash flows ($)

Project 0 1 2
A -2000 500 500
B -2000 500 1800
C -2000 1800 500

ACCOUNTING RATE

The ARR formula is “average annual revenue”/ “initial invest

Cash flows ($)

Project 0 1 2
A -1800 500 500
B -1800 500 1800
C -1800 1800 500
Depriciation is on a straight line method
 Net Present V

A project’s Net Present Value is calcualted by subtracting the

investment made in year 0 at a given discount rate

rate 10%

Year A NPV B NPV

0 -2000 -2000
1 500 500
2 500 1800
3 5000 $2,624.34 0 $300.00

INTERNAL RATE O

Year A B C
0 -2000 -2000 -2000
1 500 500 1800
2 500 1800 500
3 5000 0 0
 51% 8% 12%

MODIFIED INTERNAL RA

Year Cashflows
0 -30
1 10
2 10
3 10
4 10
5 10
6 10
7 10
8 10
9 10
10 -65

MIRR 10%
 Pay Back period

ng the number of years it takes before the

$)
3
5000 2.2years
0 1.8333333
0 1.4

OUNTING RATE OF RETURN (ARR)

/ “initial investment.”

$) Net Profit= cash flow-D

3 Project 0 1
5000 A -1800 -100
0 B -1800 -400
0 C -1800 900
method
 Net Present Value (NPV)

subtracting the Present value of future cash flows from the present value of
rate

C NPV
-2000
1800
500
0 $300.00

TERNAL RATE OF RETURN (IRR)

D INTERNAL RATE OF RETURN (MIRR)
ofit= cash flow-Depr
2 3
-100 4400
900 0
-400 0
resent value of
Nonconventional Cash Flows

Non Conven

Year A
0 -60
1 155
2 -100

0% -5.00
10% -1.74
20% -0.28
25% 0.00
30% 0.06
33.33% 0.00
40% -0.31

Mutually Ex

Year Investment A Investment B

0 -100 -100
1 50 20
2 40 40
3 40 50
4 30 60
Non Conventional cash flows

Mutually Exclusive Projects

Discount rate NPV (A) NPV(B)

0% 60.00 70.00
5% 43.13 47.88
10% 29.06 29.79
15% 17.18 14.82
20% 7.06 2.31
25% -1.63 -8.22
Summary of investment criteria
ment criteria
Question 1
Consider the following two mutually exclusive projects:

Year A B CF A CF B
0 -245000 -53000
1 34000 31900 34000 31900
2 49000 21800 83000 53700
3 51000 17300 134000 71000
4 325000 16200 459000 87200

Whichever project you choose, if any, you require a return of 13 perc

your investment.
a. If you apply the payback criterion, which investment will you choo
Why?
b. If you apply the NPV criterion, which investment will you choose
c. If you apply the IRR criterion, which investment will you choose?
d. If you apply the profitability index criterion, which investment wil
choose? Why?
e. Based on your answers in parts (a) through (d), which project will
choose? Why?

Question 2
The Yurdone Corporation wants to set up a private cemetery busines
According to the CFO, Barry M. Deep, business is “looking up.” As
the cemetery project will provide a net cash inflow of $164,000
for the firm during the first year, and the cash flows are projected to
of 4.7 percent per year forever.

The project requires an initial investment of $1,825,000.

a. If the company requires a return of 12 percent on such undertaking
should the cemetery business be started?

b. The company is somewhat unsure about the assumption of a 4.7 p

growth rate in its cash flows. At what constant growth rate would the
company just break even if it still required a return of 12 percent on i
 return of 13 percent on

ent will you choose? A B

Payback 3.341538462 1.96788990825688
will you choose? Why? NPV ₹ 51,448.52 ₹ 12,591.34
will you choose? Why? IRR 21% 27%
ch investment will you

hich project will you finally

cemetery business.
“looking up.” As a result,
of $164,000
are projected to grow at a rate

CF1
Gordon with growth
such undertakings,
PV according to Gordon's model(with growth) > Cost

mption of a 4.7 percent 0.0301369863013699

th rate would the
of 12 percent on its investment?
 164000
2246575.342
growth rate to break even
Q1 Year Cash flow PV
0 -75000 ₹ 75,000.00
1 44000 ₹ -39,639.64
2 44000 ₹ -35,711.39
3 59000 ₹ -43,140.29

Payback period 1.70454545455

NPV ₹ 43,491.32
IRR 40%

Q2 Year Cash flow PV Cumulative

0 -690000 ₹ 690,000.00
1 138000 ₹ -120,000.00 138000
2 138000 ₹ -104,347.83 276000
3 138000 ₹ -90,737.24 414000
4 138000 ₹ -78,901.95 552000
5 306000 ₹ -152,136.08 858000

Q2a 690000
Q2b 138000
Q3 ₹ -143,876.90 No don’t invest if required ror is 15%
Q4 Payback period4.45098039216
IRR 7%
Q1
Year Cash Flow
0 -500
1 152.5
2 152.5
3 152.5
4 152.5
5 152.5

Q2 Year 0 1 2 3 4
Cash Flow -110 47.2 47.2 47.2 65.2
New Machinery -130 47.2 47.2 47.2 47.2
Machine Sold 20 18

Depre 28
NPV

Q3 Year 0 1 2 3
Cash Flow -15 14.6 14.6 15.92 ₹ 22.30
PC -15 1.2
Software -16.8 0.12
14.6 14.6 14.6
Amortization 16.8
Caselet 1 Year Cash Flow PV
0 -100 ₹ 100.00 Year
1 34 ₹ -29.57 1
2 32.5 ₹ -24.57 2
3 31.375 ₹ -20.63 3
4 30.532 ₹ -17.46 4
5 76.593 ₹ -38.08 5
₹ 30.31

CF 5 29.899
Cf5 26.694 CoC
20 76.593 Equity
Pref
Debt

Caselet 2 Year 0 1 2 3
Cash Flow -100 20.00 31.50 41.63
Cumulative CF 20.00 51.50 93.13

Payback 0.834834835
NPV ₹ -8.13
IRR 11%

Cowin Sales Working Capital

1 100 20
2 150 30 10
3 200 40 10
4 150 30 -10
5 100 20 -10
Depreciation
20
15
11.25
8.44
6.33
18.98

45 15% Assumed
5 15%
50 15%

4 5 1 2
28.22 14.40 Sales 100 150
121.34 135.75 -VC 50 75
Contibution 50 75
-MARGIN 35 60
-OPEXP 15 20
EBITDA 20 40
-DEPRE 25.00 18.75
EBIT -5.00 21.25
-INT 0 0
EBT -5.00 21.25
TAX @ 40%
Year Depreciati WDV EAT -5.00 12.75
0 0.00 100.00 +DEPRE 25.00 18.75
1 25.00 75.00 +BAD DEBT
2 18.75 56.25 +OH ALLOCATION
3 14.06 42.19 Salvage Loss
4 10.55 31.64 CF 20.00 31.50
5 7.91 23.73
 3 4 5
200 150 100
100 75 50
100 75 50
85 60 35
25 20 20
60 40 15
14.06 10.55 7.91
45.94 29.45 7.09
0 0 0
45.94 29.45 7.09

27.5625 17.67188 4.253906

14.06 10.55 7.91

2.238281
41.63 28.22 14.40