INVESTMENT CRITERIA

Discounting Criteria • NPV • Benefit to Cost Ratio • Internal Rate of Return 2.Investment Criteria 1. Non-Discounting Criteria • Payback Period • Accounting Rate of Return .

000 n 2 3 4 5 200.a.000. NPV Ct NPV    Initial Investment t t 1 (1  r ) Year 0 1 Cash Flows (1.000 300.000) 200.000 300.000 .000 350.1.

.NET PRESENT VALUE (NPV) Present Value of Inflows – Present value of Outflows Evaluating the Project Accept if NPV >0 Reject if NPV <0 May Accept if NPV = 0 IF two or mutually exclusive projects. then the project with the highest NPV is chosen.

Merits of NPV  Recognizes TV of money. NPV of two projects is simply the sum of NPV of individual project .  Any change in cost of capital can be built into the evaluation process by changing the discount rate.  This Method helps to calculate the NPVs of two mutually exclusive projects.

INTERNAL RATE OF RETURN (IRR) Is the rate of return that equates the NPV of a project to zero Present Value of Inflows - Present value of Outflows =0 .

then Accept the project if r>K Reject the project if r < K May accept if K= r .Evaluating the Project If K is the cost of capital and r is the IRR.

000 20000 75.mutually exclusive projects Cash Flow Project Co C1 IRR NPV (r12%) P Q -10000 -50.Example.964 .000 100% 50% 7857 16.

Rs.000. Compute the IRR of the project. Rs30.000.98% required rate is 16%? Formula: IRR  Lower rate  NPV at lower rate  ( Higher rate  Lower rate) NPV at lower rate  NPV at higher rate .000 and is expected to generate net cash inflows of Rs. 81.000 over its life of three years. Should the project be accepted if the Ans: 14.35.40.A project costs Rs.

Benefit Cost Ratio (BCR) Also called Profitability Index BCR = PV of future cash flows Initial Investment Evaluating the Project Accept if BCR >1 Reject if BCR <1 May Accept if BCR = 1 .

Compute the BCR or PI of the project if the discounting rate is 14%.000 and is expected to generate net cash inflows of Rs.40.000.000 over its life of three years. 81. Rs.000. 1.A project costs Rs. Rs30.02 Should the project be Ans: accepted ? .35.

000 and generates cash inflows of Rs 100.000 at the end of 1st.000 and Rs 200. Rs 150.Payback period  Time period required to recover the initial outlay Example: A project involves a cash outlay of Rs 600.000. 2nd and 3rd years .

Limitations  Fails to consider the time value of money  It ignores cash flows beyond the payback period  It’s a measure of project recovery not Year the profitability 1 0 2 3 4 5 6 Cash flow of A -100000 50000 30000 20000 10000 10000 Cash flow of B -100000 20000 20000 40000 50000 30000 - .

Ans: 2 and 6 months 2 years.000 respectively. 11months.Discounted Pay Back Period Pay back period is defined as the number of years required to recover the original investment in a project A project involves an initial outlay of 40. 14 days . If the discount rate is 10%. compute the discounted pay back period.000 and 20. 20.000.000. The cash inflow in the first second and third year from the project are 10. Compute the pay back period.

ARR (Accounting Rate Of Return) ARR = Average Income/ Average Investment ARR = Σ EBIT (1-t) /n (I0 + In)/2 .

08.07 90473.93.08920393.3/24398 0.8903:2-07410.-.5074/8/0130/.0 425:90905.4:390/!.425:9090/8.9.-...43/.!074/ !.-.3/97/0.3/ 70850..4:390/ 5.4:9..78706:70/9470..70   . 5074/ 190/8.5074/ 38 .8.908  .4:397.78 24398 /..9 5740.41 %0.4.71742905740.3.9.4.8 .5740.8314 390178980.339.

4:393#..## .03.90 1#09:73 ##.420.07.

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