Capital Budgeting on Mercedes Benz

Submitted by
Name: Dibyanshu Singh
REG NO: PG23086
Course: Managerial Finance
2024- 25

Submitted to
Prof. Veena
ISBR Business School

ISBR Business School

107, ISBR Business School, near, Infosys Drive, behind BSNL Telephone
Exchange, Electronics City Phase 1, Electronic City, Bengaluru 560100
Mercedes Benz company wants to invest in a new project cost 45000 crores. They want to
know the following values to check whether to proceed with the project or not.
i) NPV
ii) IRR
iii) Payback
Period
iv) Profitability
Index
v) ARR
Consider the discount rate at 10% for the capital budget analysis

Initial Investment – 45000

1) NPV
Npv: Total PVCF - Initial Investment
: ₹ 5,866.33

2) Internal Rate of Return (IRR)

NPV @10% 50866.33073 II= 45000
NPV @15% 43381.64881 HR= 15%
LR= 10%
50866.3307
IRR= LR+[(HR-LR)(HA-II)/(HA-LA)] HA= 3
43381.6488
IRR: 14% LA= 1

3) Payback Period
Using Cumulative method
year cashflow Remaining Amt
2018 343 -44657
2019 7888 -36769
2020 22332 -14437
2021 24549 10112
 2022 16894
Payback Period: 2 YEAR AND 5 MONTHS

4) Profitability Index (PI)

Present Value Cash Inflow
PI =
Present Value Cash Outflow

PI = 1.130362905

5) ARR Accounting Rate of Return (ARR)

6) Average Profit
ARR=
7) Average Investment

ARR = 0.341653333

Overall Interpretation: -
 Net Present Value (NPV) = 5,866.33crores: This is a positive value, indicating that
the project is expected to generate a net cash inflow over its lifetime after considering
the initial investment of 45000 crores.
 Internal Rate of Return (IRR) = 14%: This is significantly higher than the cost of
capital (which is the minimum rate of return investors expect), indicating the project
is highly profitable.
 Payback Period (PBP) = 2 years 5 days: The project is expected to recover its initial
investment within a relatively short period, which reduces risk.
 Profitability Index (PI) = 1.130362905: A PI greater than 1 suggests the project is
expected to generate returns that are higher than the initial investment.
 Accounting Rate of Return (ARR) = 0.341653333: While ARR is not the most
robust metric for capital budgeting decisions, a value greater than 1 might provide
further support for the project's profitability.