ABC Ltd. Is in the process of selecting a capital project.

The details of two capital projects A and B identified by the company

PROJECT A PROJECT B
RATE OF
INTEREST 12% 12%
COST OF
PROJECT -500,000 -550,000
CASH
INFLOWS
YEAR 1 400,000 20,000
YEAR 2 60,000 500,000
YEAR 3 50,000 60,000
YEAR 4 70,000 70,000
YEAR 5 80,000 80,000

You are required to:

1. Evaluate the above capital budgeting projects and recommend the project to be implemented so that the company earns
a) IRR Method
b) NPV Method using 12% discount rate
2. Calculate the value of NPV of project A at the rate of interest of 10% to 15%

SOL.1)
NPV 30,443.92 -958.69
IRR 16% 12%

PROJECT RECOMMENDED ON THE BASIS OF

NPV PROJECT A
IRR PROJECT A

SOL.2) NPV OF PROJECT A AT DIFFERENT RATES OF INTEREST 10%

48,273.53
SOL.3)
NPV OF PROJECT A AT DIFFERENT RATES OF
INTEREST
60,000.00

50,000.00 48,273.53

40,000.00 39,204.55
NPVs

30,000.00 30,443.92

20,000.00 21,976.72
13,788.93
10,000.00
5,867.38
0.00
9% 10% 11% 12% 13% 14% 15% 16%

RATE OF INTEREST
 ects A and B identified by the company are provided below:

RATE OF
INTEREST
COST OF
PROJECT

CASH INFLOWS
YEAR 1
YEAR 2
YEAR 3
YEAR 4
YEAR 5

mplemented so that the company earns maximum profit on the basis of

NPV
IRR

PROJECT RECOMMENDED ON THE BASIS OF

NPV
IRR

11% 12% 13% 14% 15%

39,204.55 30,443.92 21,976.72 13,788.93 5,867.38
 PROJECT A PROJECT B PROJECT C

12% 12% 12%

-500,000 -550,000 -75,000

400,000 20,000 50,000

60,000 500,000 54,000
50,000 60,000 62,000
70,000 70,000 4,000
80,000 80,000 100,000

30,443.92 -958.69 116,106.46

16% 12% 63%

ECT RECOMMENDED ON THE BASIS OF

PROJECT C
PROJECT C
 CASH FLOWS
DATES (RS.)
12-Jun-12 -1,500,000

13-Jan-13 500,000

20-Nov-13 220,000
15-Jan-15 230,000
6-May-16 245,000
10-Oct-17 115,000
If the reinvestment rate is 10%, calculate NPV and IRR of this project.

re-investement
rate 0.1

NPV -417816.116
IRR 5.97
rate of interest
discount rate

cost of capital
reinvestement
rate
Assume a company is reviewing two projects. Management must decide whether to move forward with one, both, or neither.
PROJECT A PROJECT B
INITIAL INITIAL
OUTLAY -5,000 OUTLAY -2,000
YEAR 1 1700 YEAR 1 400
YEAR 2 1900 YEAR 2 700
YEAR 3 1600 YEAR 3 500
YEAR 4 1500 YEAR 4 400
YEAR 5 700 YEAR 5 300
with one, both, or neither. Its cost of capital is 10%. The cash flow patterns for each are as follows: