Eg: computation of cash flow for the purpose of PBC

1) Profit before
Taxes and depn: 50,000
Depn : 10,000
Rate of tax - 30%
Computes C.F. From the above details
PBT & D

50,000

(-) Depn

10,000
----------

PBR

40,000

(-) Taxes

12,000
---------

PAT

28,000

(+) Depn

10,000
----------

CF (PAT + Depn)

38,000
----------

2. Computation of PB when cash flows are uniform

PBP= Initial Inv.
Uniform annual cash inflow
Eg: A profject costs 2100,000 and yields an annual cash inflow of
220,000 for 8 yrs
Assertion the PBP
Sol
PBP=

I.T.
A.U.C.I

Initial Inv.
Uniform annual

Cash inflow
PBP=5 Yrs.
Case II When cash flows are uneven:1. Initial cash outlay of an Inv. Is 2100,000

100,000
20,000

Expected cash inflows Rs 20,000; 40,000; 30,000; 20,000 for the

first 4 yrs. Compute the PBP
PBP= 20,000 + 40,000 + 30,000 + 100,00-9000
20000
=3.5 yrs.
2. Cost of Xerox machines is Rs 100,000 & is estimated to bring in
returns of 40,000, 50,000 & 60,000 in its useful life of 3 yrs.
Compute the PBP
3. PBP= 40,000+ 50,000 + ( 100,000 -90000)
60000
=2.17 yrs.
4. A project costs Rs 500,000 and yields a profit of Rs 80,000 after
depreciation at 12% p.a but before tax at 50% compute the PBP
Computation of case flows
PBT & after depn 80,000
(-) Tax

40,000
---------

PAT

40,000

(+) dep at 12%

60,000

Each inflow

1,00,000

PBP = T.I
U.A.C.I
= 500,000
100,000

PBP =5 yrs

5. There are 2 projects X & Y each requires an individual of Rs

29,000. You are required to rank the proposals on the basis of
PBP
Sol; Years
I
At
Y
1
1000
2000
2
2000
4000
3
4000
6000
4
5000
8000
5
8000
Sol. Net profit Before depn and after tax

X PBP= 1000 + 2000+40000+5000+20000-12000 = 5 yrs

8000
Y PBP = 2000 + 4000+6000+ 20000-12000 = 4 yrs
8000
Project Y is recommended as it has a lower PBP compared to project X
5. Initial Inv. Is Rs 10,00,000 Life of the proposal 4 yrs
PBD and Before taxes are as follows:
Years

Inflows

5lac

4 lac

3 lac

1 lac

Ascertain the PBP of the proposal

Sol: step:1 computation of cash flow
Year Amount

Dep

PADBT

Tax at 30%

PAT

1.

5 Lac

250000

25000

75,000

1,75,000

2.

5 Lac

250000

150000

45,000

1,05,000

3.

3 Lac

250000

50000

15,000

35,000

4.

1 Lac

250000

1,50,000

Depn

CIF (PAT + Depn)

2,50,000

4,25,000

2,50,000

3,55,000

2,50,000

2,85,000

2,50,000

1,00,000

Step II computation of PBP

425000 + 355000 + (10,00000-780000)
385000
= 2.77 yrs.

1,50,000

Prob 8 :
Particulars
Estimated savings on a/c of
1. Scrap
2. Direct labour
Total savings
Less: Running & Maint apr
Supervision cost
Net savings

Machine

Machine

5000
60000
65,000
(800)
(12000)
45,000

8,000
80,000
88,000
(10000)
(18000)
60,000

Pay back period = Initial Inv

Estimated savings p.a
90,000

18,000

45000

60000

2 yrs

3 yrs

Conclusion : As the PBP of M is lesser than N machinery M is suggested

Note:
Depn. Has been ignored on account of tax ( No tax No Dep)
Ptob;9
Computation
Working note;
Computation of depn.

Dep cost scrap

3 lac-40000

3lac-25000

Life

2 yrs

3
91607

Income statement

3 l- 300000
3
90000

Machinery

Particulars
Particulars
Annual cash sales
(-) Direct material
Labour
Factor OHs
Admin. OHs
S&D Cost
Int. on capital
EBD & T
No.1
EBT

1
500000
(40,000)
(50,000)
(60,000)
(20,000)
(10,000)
(30,000)
2,90,000
(1,30,000)
160,000

2
4,00,000
(40000)
(30,000)
(50,000)
(10,000)
(10,000)
(30,000)
2,30,000
(91667)
138,333

3
4,50,000
(48000)
(36,000)
(58,000)
(15,000)
(10,000)
(3,00,000)
2,53,000
(90,000)
163,000

CASH FLOWS
(EAT + Depn)
Pay back period Int, Inv
Est. c.f

112000
2,42,000

96,833
1,88,500

114,100
204,100

300,000

300,000

300,000

242000
=1.24 yrs

188500
1.6 yrs

204100
1.47 yrs

Machinery I is recommended as it has a lesser pay back period.

(a) Post pay back period method:
Pro. 10 computation of PBT

Project A

Porject B

PBP = Initial Inv.

50000

50000

Uniform annual cin flow

100000
5 yrs

Case B : Computation of post PBP profit &

Post PBP = Uniform Ann C.I.F. (LIFE OF Proj PBP)
10000 (8-5)
Proj.A

30000

Proj B : 15+15+15+15+5=50000
PPBP Profit remaining life x cash inflow
4x5000
20,000
Case 3 computation of PPB Prof : index
Project A =Post pay back profit x 100
I. Inv
A = 30000 x100=60%
50000
B = 20000 x100=40%
50000
Pg.5 computation of PBP
Prob 11: Project A 1 or
3l+ 2.5L + 2.5 L + 2.L = 4 yrs

4 yrs

Project B = 13 la
5L+4L+4L + 2L 3.67 yrs
3L
Post pay back profitability :
Project : A 2 Lacs
Project B = (19-15) = 4 lacs
PPBP Index
PBBPx100

2lacs x 100

4 lacs x100

Ini. Inv

10 lacs

15 lacs

20%

26.67 = 27%

Pg5 Discount pay back method

Prob: 12 Computation of discounted PBP
Year

cash inflow

Disc. Fact

PV

2 lacs

0.909

181800

2 lac

0.826

145200

2 lac

0.751

150200

4.

2 lac

0.683

136600

5.

2 lac

0.620

124000

PBP = 181800 + 165200 + 150200 + 102000

136600
Dis. PBP

3.75 yrs

Pg6 computation of ARR

Prob 1 : 1: computation of Avr. Profit
Avr. Profit = Total Profit =

40,000+60+70+50+20

Life of proposal
Avr. Profit = 48000
No.3, Avr. Inv. Net Inv = 480000
2

2,40,000
ARR Avr-profit after tax x100
Net Inv

48000x100
480,000
ARR 10%
ARR = Avr profit after tax x 100 48000x100
A.I

240000
ARR = 20%

Particulars
Total profits
Avr. Profit

A
6000
6000=1500
4
Pnr Inv.
2000=10000
2
a) ARR Avr-profitx100
1500x100
20000
Net. In
7.5%
b) ARR= A.PX100
1500=100
10000
A.I
15%
Project A can be accepted as its ARR that of project B

B
10000
1000=2000
5
30000=1500
2
2000x100
30000
=6.69%
2000=100
13000
13.33%

Pg.7
Prob 4: computation of PAT
Project E
1
2
3
4
5.

PBT
15000
20000
25000
15000
10000

Tax
4500
6000
7500
4500
3000

Avr. Profit = 59500

Therefore Avr.profit = Total profit x 59500 = 11900
Life

ARR= Avr.PAT X 100 11900X100= 30.67%

30000
AI=

T.I

60000

30000

2
Project F:
Years

PBT

Tax

PAT

50000

1500

3500

15000

4500

10500

20000

6000

14000

PAT
10500
14000
17500
10500
7000
59500

4.

30000

9000

21000

20000

6000

14000
---------63000

Avr. Profit = Total profit 63000 =12600

Life
ARR = Avr PAT X100
A.I
A.I.

T.I

12800X100 = 42%
30000

60000 = 30000

CONCLUSION:
Project F is recommended as its ARR is higher.
Pg.7 Computation of Avr. Profit:
Pro.b 5

Total Profit 20+40+30+15+5=110,000

Before depn
Avr profit = 110000 = 22000
5
Before depn.
Computation of Depn
Depn = cost scrap
Life

80,000=10000

14000

Avr profit aftr depn avr profit -depn =avr profit depn
Before dep

22000-14000=13000

Therefore return on original Inv. Avr-profit after tax

Initial inv
8000x100
80000
10%
Pg:6
Average profit after tax = 230,000 = 46000
5
Avr investment =Total Inv scrap = 5 lacs 40000
2
2
Avr. Inv= 230,000
Net Inv = Total in ser = 5 lacs 40000=4600000

ARR= Avr profit = 46000x100=10%

Net Inv. 46000
ARR = AP = 46000X100=20%
AI

230000

EG: A co is considering a proposal. This proposal coil Rs 3,00,000 estimated

scrap value at the end of life ie 10 yr is Rs 30,000. The working cost is
introduced is Rs 1,50,000. The applicable tax rate is 30%
Years

PBD&

40

2
45

10

43

47

36

44

29

39

28

38

Compute the ARR on the basis of average Inv. Method

Sol; Computation of depn
Depn =cost scrap = 300000=30000=270000
10
No.2, computation of pat
YEARS
ESD& T
Dep2
PADBT
1
40000
270000
13000
2
45000
270000
18000
3.
43000
270000
16000
4.
47000
270000
20000
5.
56000
270000
19000
6.
44000
270000
17000
7.
29000
270000
20000
8.
29000
270000
12000
9.
28000
270000
1000
10.
28000
270000
1000

Tax
3900
5400
4800
6000
2700
5100
3600
3600
300
300

PAT
9100
12600
11200
14000
6300
11900
1400
8400
700
700
-------76300

Pv for X

PV for Y

Avr. Profit after tax = 76800=7630

10
No.3, Computation of average investment :
A.I. ( I.T. S.V.) + S.V. + Initial Inv./WC
2
(300,000-30000) + 30000+150000
2
A.I. = 3,15,00
Arr = AP After taxes x 100 = 7630x100
A. Inv.
315000
ARR = 2.42
Pg:9 PROBLEMS :
Prob: 1 Computation of NPV
Year
Cpu

20000

5000

Dos/
factor
0.909

4545

18180

2
3
4
5
5
Scrap
value

10000
10000
3000
2000
1000

10000
5000
3000
2000
2000

0.826
0.751
0.683
0.621
0.621
DCIF

8260
7510
2049
1242
621
24227

8260
3755
2049
1242
1242
34728

NPV

20000
4227

30000
4728

Both the proposals can be accepted as they have positive NPV provided that
capital is not a constraint
Prob: 2 #1 computation of DCDF
Year
cashout flow
Dis. Fact
0
150000
1 (1/10)
1
30000
0.909

Pv
150000
27270
---------177270

EDCOF
Computation of E DCIF
Year

Cif
20000
30000
60000
80000
30000
40000

D.Factor
1
0.909
2
0.826
3
0.751
4
6.683
5
0.621
5
0.621
DCIF
COMPUTATION NPV= E DCIF = EDFCOF
1816130-177270 =+8860

Pv
18180
24780
45060
54640
18630
24840
186130

As the NPV is +ve the proposal can be accepted.

Prob.3 computation of NPV
Year
1
2
3
4
5

Cof (A)
40000
120000
160000
240000
160000
Less

Cf(B)
12000
160000
200000
120000
80000
EDCI
EDCOI
NPV

COC
0.909
0.826
0.791
0.683
0.621

As the NPV of Mac.B > Mac.A NacB is recommended.

Prob:B Computation of PBP
Mac A : 40+120+160+400000-320000=3,33yrs

PV (A)
36360
99120
120160
163920
99360
518920
400000
118920

PV(B)
109080
132160
150200
81960
49680
523080
400000
123080

200,000
Conclusion : Based on the NPBP again Mac B is suggested as its PBP is
lower than that of MaC A
Case C : Annual rate of return :
Computation of ARR :
MACHINERY
PARTICULARS
Total cash flows
Dep for ( -) cost of the man
Pat for 5 yrs

A
720000
400000
3200000

B
680000
400000
230000

Avr. Profit after tax = Total profit after tax

5
Computation of Avr.Inv
AI = T.I = 400.000
400,000
2
2
2 lacs
2 lacs
ARR= Avr-Prof.After Tax 64000x100=32%
2 lacs
36000x100=28%
2 lacs
Machinery A is recommended as its ARR is higher based on ARR
Pag 12 Computation of IRR
Year
CI
COC at
10%
1
15000
0.909
2
20000
0.826
3
30000
0.751
4
20000
0.683
Less :Initial
Inv
NPV
STEP ii COMPUTATION OF IRR

PV

Rs at 15%

13635
16520
22530
13660
66345
60000

Cocat
15%
0.870
0.756
0.658
0.572
EDCIF
Ini.Inv

+6345

NPV

-650

Assurance
COC
At 20%

PV at 20%

13,050
15,120.00
19740.00
11,440
59350
60000

By employing linear interpretation the value of IRR is

IRR= (+ve rate) + (+ve NPV) x diff. in rate
(+NPV)+(-NPV)
10% + 6345 x5%

14.54%

6345+650
(Take 15%)

(-750)= 11.33%

Pg13
Prob.3 Computation of IRR
Year
CI
Cocat
10%

PV

1
2
3
4

6000
2000
1000
5000
(-) Initial
Inv
(+)

0.909
0.826
0.751
0.683

5454
1652
751
3415
11272
11000

0.833
0.694
0.579
0.482
(-)

272

4998
1388
579
2410
9375
11000
-1625

IRR = 10% + 272x10%

272+ 1625
10+ 272x10
1897
18970 + 272x10% = 11.33%
1897
Pro.B
Year
1
2
3
4

CI
1000
1000
2000
10000
(-) Initial
Inv
(+)

Cocat
10%
0.909
0.826
0.751
0.683

PV at 10%
909
826
1502
6830
10067
10000

Cocat
12%
0.893
0.797
0.712
0.636
(-)

67

Pv at 10%
893
797
1424
6360
9474
10000
-526

IRR = 10+ 67x2

67+526
IRR=10.23%
Conclusion : As the COC of the firm is not given it is assumed that COC of the
firm is 10% based on IRR both the proposals is > than COC of the firm. As
the projects are mutually inclusive Proj..A is suggested us its > than that of B
Year
1
2
3
4
5.

CI
10 lacs
20 lacs
30 lacs
45 lacs
60 lacs

CF
50 lac
40 lac
20 lac
10 lac
10 lac

(-) Initial
Inv
NPV
Computation of IRR = 10% + 272x10%

COC 10%
0.909
0.826
0.751
0.683
0.621

X PV(x)
9,09,000
1652000
2253000
3073500
3726000
11613500
70,00,000

Pv (y)
45,45,000
3304000
1502000
683000
621,000
10655000
70,00,000

46,13,500

3655,000

Year
1
2
3
4
5.

COC AT
PV OF X
40%
0.714
7,14,000
0.510 10,20,000
0.364 109,20,000
0.260 11,72,000
0.186 11,16,000
(-)
70 LACS
(-)
1888000

PV OF Y
3570000
2,04,000
728000
260000
1,86,000
70 LACS
1,62,000

FOR x
IRR 10+ 46,13,500 x30
4613500+14000
IRR for X = 28.07%
IRR for Y = 38.33%
Benefit cost Ratio /Profitability index
The cash flow refers : PAT + Depn
Formula GPT = EDCIF
EDCOF
Acceptance and rejection criteria:
If GPI > 1 accept
GPI <1 Reject
GPI = 1 (Indifferent) may or may not be
Net Profitability Index :
Formula NPI=GPI-I decision
If NPI > 0 accept
If NPi < o reject : If NPI =O indifferent
Pg. 14
Prob:1 # 1 computation of NPV
Year
1
2
3
4

c.Inf
2000
15000
25000
10000

Coc at
10%
0.909
0.826
0.751
0.683
EDCIF

PV
18180
12390
18775
6830
56175

#2 Computation of PI
GPI = EDCIF 56175 = 1.12
EDCOF 50000
NPI= GPI=1
NPI-0.12
Conclusion : It is clear that GPI of the proposal is greater than 1 & NPI > 0
hence it is accepted.

Prob:3 computation of NPV

Year

C.I.

1
2
3
4

COC AT
10%
0.909
0.826
0.751
0.683

40000
3000
50000
20000

PV
36360
24780
37550
13660
112350

#2 Computation of PI
GPI = EDCIF 112350= 1.12
EDCOF 100000
NPI= GPI=1
NPI-0.12
GPI >1; NPI>0 hence accepted
#2 Computation of PI
GPI = EDCIF 56175 = 1.12
EDCOF
NPI= GPI=1
NPI-0.12
GPI>1: NPJ>0 Hence accepted/
Prob: 2 Initial inv. 20 lacs PVA at 12% for 7 yrs = 4.5638
COC 12%

n= 7 yrs

P.I 1.182
1st computation of EDCOF
PI= EDCIF

1.182=

EDCDF

EDCIF
20 Lacs

EDCIF = 23,64,000
STEP-ii COMPUATION OF REQUIRED ANNUAL CASH INFLOW
RACIF = EDCIF

2364000

PVA at 12% for 7 yrs

4,5638
RACIF = 417,989

Comprehensive problems on Capital budgeting :

Page 15 computation of DPBO
Year
1
2
3
4
5.
6.
7.

A.C.I.
600,000
450,000
250,000
250,000
200000
150,000
150.000

Dis. Fact
0.893
0.797
0.712
0.636
0.567
0.452
0.452

PV
535800
358650
178000
159000
113400
76050
67800

8.
75,000
0.404
30300
DIS : PBP : 5315800 + 358650+ 178000 + 159000+113400+76050
+ 67800+(15,00,000=1488700)= 7.37 YRS
30300
Pg.15
Prb: 2 1 Computation of depn
A
B
No depn I.T. S.V.
50000-0
80000-0
Life
4
6
Depn
12500
13.333
#2 computation of cash inflow
Mac. A
Year
PBT
Depn
PBT
Tax at
PAT
PAT +
30%
Depn
Cash
flow
1.
1000
12500
2500
2500
10,000
2
15000
12500
2500
750
1750
14250
3
20000
12500
7500
2250
5250
17750
4
15000
12500
2500
750
1750
14250
Mac.B
Year
PBT
Depn
PBT
Tax at
PAT
PAT +
30%
Depn
1.
8000
13333
5333
5333
8000
2
14000
13333
667
200
467
13800
3
25000
13333
11667
3500
8167
21500
4
30000
13333
16667
5000
11667
25000
5
18000
13333
4667
14000
3267
16600
6
13000
13333
333
333
13000
In this prob the method of decision making is not given it is assured that NPV
is appropriate for mutually inclusive propsoals.
As the COC is not given it is assured that COC of the firm is 10% computation
of NPV
Mac. A year
1
2
3
Year
1
2
3
4.
5
6.

CI

CI

10000
14250
17750
14250
-

8000
13800
21500
25000
16600
13000
EDCOF

Coc at
10%
0.909
0.826
0.751
0.683
0.621
0.564
EDCIF

Pv
0990
11771
13330
9733
43924
50000
5076

PV
7272
11399
16147
17075
10309
7332
69534
80000
10466

As the NPV of both the proposals are-ve both are rejected

Pg15 Case 1 PBP:
Proposal A 20,000+ 40,000+60,000+(140-120) = 3.2yrs
100,000
Project B 100,000 + (140000-80000) =1.5 yrs
80000
Case B Computation of NPV
Year
1
2
3
4.
5

Cf(A)
Cf(B)
20000
100,000
40000
80000
60000
40000
100,000
20000
110,000
20000
EDCIF
Less:
Initial Inv.
NPV
72000
Computation of P.I.
GPI=EDCIF
EDCDF

NPI =GPI 1

Dif (12y)
0.9
0.8
0.7
0.6
0.55

65000
Proj.A
212500
140000
1.52 times
0.52

PV(x)
18000
32000
42000
60000
60500
212500
140000

Pv(y)
90000
64000
28000
12000
11000
205000
140000

Proj.B
205000
140000
1.46 times
0.46

Interpretation : As the project are mutually exclusive. One of the project shall
be selected based on capital constraints and suitability, based on PBP project
B is selected as its PBP is < proposal A
Based on NPV project A is selected as its NPV is greater than that of project
D
Based on PI on this basis proposal A shall be selected as its GPI & NPI >
proposal B
Pg:16
Prob: 5: Computation of cash inflows
Year
PBTBD
1
180000
2
150000
3
220000
4
200000
5
125000
6
100,000
CALCULATION OF NPV

Taxes
15000
10000
5000
12000
18000
20000

PATAD
165000
140000
215000
188000
107000
80000

Year
1

C.I.
16500

10%
0.090

PV
149985

0
14000

0.826

115640

0
21500

0.751

161465

0
18800

0.683

128404

0
10700

0.621

66447

0
80000

EDCIF= 667,061
(-) EDCOF=750000
82939

0.564
45120
EDCIF
667061
At 10% COC NPV is 82939 the arrive at 1 +ve let me try a lower rate i.e
5%
Computation of IRR
Year
1
2
3
4
5
6

C.I.
16500
0
14000
0
21500
0
18800
0
18700
0
80000

At 5%
0.952
0.907
0.864
0.823

PV at 5%
157080

IRR=5+18112
18112+82939x5%
IRR= 5.88% = 5.90%
126980 Conclu: As the NPV is
ve & IRR is below
185760 COC the proposal is
rejected.
154724

0.784

83888

0.746

59680
768112
750000
18112

Initial inv.

Computation of Depreciation #1
Depn : C-S 600,000-100,000=6100,000
5
Computation of C.I.
YEAR
1
2.
3
4
5

PBTAD
100,000
180,000
250000
200,000
150,000

DEPN
100000
100,000
100000
100000
100000

PBT
0
180000
150000
100000
50000

TAX
24000
45000
30000
15000

PAT
0
56000
105000
70000
35000

PAT+DEPN
100,000
156000
205000
170000
135000

COMPUTATION OF NRV:
Computation of cash overflow
C.O. Amt. invested + W.C.
585000+15000+100,000= 700,000(TO BE INVESTED AT 0 YRS)
Year
1
2
3
4
5

C.I.
10000
0
15600
0
20500
0
17000
0
13500
0
(-)

COC
0.909

PV

0.826

As the NPV of the

96900 proposal is ve the
proposal should not
128856 be acceptable

0.751

153955

0.683

116110

0.621

83835

EDCIF
EDCOF
NPV

573656
700,000
126344

Pg16
Prob: #1 computation of cash airflows at the legitimate
cost of new machine
270,000
(+)W.C. Required at the beg.
40,000
T,cash outflows
310000
Computation of cash inflows PAT + Depn.
Year
PBDBT
Tax pay
PAT + DEPN
1
90000
20000
70000
2
130000
30000
100000
3
170000
40000
130000
4
116000
26000
90000
5
19500
5000
14500
COMPUTATION OF NPV AT VARIOUS CUT OFF RATE/DISCOUNT ROLE
YEAR
CASH IN FLOW
DISFACTOR
PV
1
70000
0.9009
63063

2
3
4
5
EDCDF
(-)Ini.Iv

100,000
13000
90000
14500

0.8116
0.7312
0.6587
0.5935
DCOF

81160
95056
59283
8606
307168

307,168
310,000
----------- 2832

COMPUTATION OF CASH INFLOWS

Year
1
2
3
4
5

PBTAD
TAX
PAT
DEPN
PAT+DEPN
60000
18000
42000
50000
92000
70000
21000
49000
50000
99000
90000
27000
63000
50000
113000
100000
30000
70000
50000
120000
150000
45000
105000
50000
155000

PBD= 92000+99000+(250000-191000)=252 yrs

113000
a) ARR = Avr.profit after taxes
````
Avr. Inv

Avr. Profit after tax

Net Inv

Where Net invest : 250000

Avr.Inv. 250000=125000
2
Avr Profit after tax Total profit after tax for 5 yrs
5 yrs
42000+49000+63000+70000+105000
5
Avr profit after tax = 65,800
b) ARR= 65800x100 = 26.37
250000
a) ARR = 258000X100 = 52.64%
125000
Year
CASH
DISFA
PV
AT
FLOW
10%
1
92000
0.909
83628
2
99000
0.826
81774
3
113000
0.751
84863
4
120000
0.683
81960
5
155000
0.621
96255
EDCIF
428480
(-) Ini.Inv
250000
NPV
178480
Computation of PI or benefit cost ratio

GPI = EDCIF 428480= 1.71 Times

EDCDF 250000
NPI GPI-I
NPI -.71 Times
Pg 17
Prob 9: cal
Projects
A
B
80000
2600
C
D

PBP
4

4000
1000

10000
2400

E
F

I,T
UACIF
Initial 1000

5000
1125

Ranking
IV

3.07

III

iv

4.16

4.14

VI

6000
2400

2.5
2000
1000
2
Computation of NPV:Proposals
T.I
UACIF
Des fac
at 10%

II

A
B
C
D
E
F
G

10000
8000
4000
1000
5000
6000
2000

2500
2600
1000
2400
1125
2400
1000

Rankings on the basis of P.I

Proposals
P.I. EDCIF
EDCOF
A
0.948 time
B
1.582 Time
C
1.902 time
D
2.043 times
E
1.71 times
F
1.74 times
G
0.868 times
Computation of cash inflow
Years
PAT
1
6000
2
14000
3
24000
4
16000

I
EDCIF

3.791
4.868
7.606
8.514
7.606
4,3655
1.756

9478
12497
7600
29434
8557
10452
1736

NPV
EDCIF
EDCOF
522
4657
3606
10434
3557
4452
264

Rankings
V
Ii
I
Iv
Iii
Depn.
16000
16000
16000
16000

CIF
22000
30000
40000
32000

Rankings
II
Iv
I
V
Iii
-

16000
Tra PBP- 22000+30000+(80000-52000)
40000
2.7 yrs

16000

Years
1
2
3
4
5

Ccif
22000
30000
40000
32000
16000

Discounted PBP
at 20%
DF
0.833
0.694
0.579
0.482
0.402

Pv at 20%
18326
20820
23160
15424
6432

Dis .PBP= 18326 +20820+23160+15424 +80000=7730

Dis PBP- 4.35 yrs
Pg 18
Prob 13 PBP for proposal A = IT =200,000 5 YRS
Uncif 40000
PBP for Proposal
40000+40000+40000+40000+40000+30000+30000+30000+20000
PBP=9 YRS.
Proposal C
80000+ 60000+ (210000-14000)=2.88 YRS
8000
Proposal D = 20000+20000+20000+0+0+0+0+0+320000-2.2LAC
.
200,000
D=8.5 YR
COMPUTATION OF NPV AS
COMPUTATION OF NPV AT 12%
YEAR

40000 40000 80000 20000

0
40000 40000 60000 20000
40000 40000 80000 40000 40000 60000 40000 40000 80000 40000 30000 60000 40000 30000 40000 40000 20000 40000 40000 20000 40000 20000
0
40000 20000 40000 50000
0

2
3
4.
5.
6.
7.
8.
9.
10.

D
178600
15940
-

DIS.FACTOR
AT 12%

0.893

35720 35720

71440

0.797
0.712
0.636
0.567
0.507
0.457
0.404
0361

31880
28480
25440
22680
20230
18880
16160
14440

47820
56960
38160
45360
30420
18880
16160
14440

0.322

12880 6440

12880

22640 19471
0

351720

31880
28480
25440
22680
15210
13560
8080
7220

72200
16100
282840
A
2 lacs
26040

(-) initial inv.

+

B
3 lac
-105290

C
210000
+141720

D
320000
-37160

40000x PV of AF at 16%
40000x4,833=193320
NPV = EDCIF EDCOF
193320-200,000
NPV( 6680)
YEAR
1
2
3
4
5
6
7
8
9
10

COCAT

40000
40000
40000
40000
40000
30000
30000
20000
20000
20000
EDCIF
(-) i.Inv
(5210)

0.952
0.907
0.864
0.823
0.784
0.746
0.71
0.677
0.645
0.614
306210
300,000

B pv AT
1%
38080
36280
34560
32920
31360
22380
21330
13540
12900
12280

C 50%
80000
60000
80000
60000
80000
60000
40000
40000
40000
40000

COC AT
50%
0.666
0.444
0.296
0.198
0.132
0.088
0.059
0.039
0.026
0.017
(-)

Rs at
50%
53380
26640
23680
11880
10560
5280
2360
1560
1040
680
136970
210000
(-73040)

B IRR = 1 + 5210 X11 =1+5210X11

105X290+5210
IRR = 1.52
P.I. for A :
GPI =EDCIF
EDCDF
GPI = 1.13 TIME
NPI

A
226040
2 lacs
0.65 TIME
013 time

B
197710
3 lacs
0.65 TIME
- 0.95

D (5%) CASH
0.952
0.907

2 lac
2 lac

190400
18140

C
351720
3 lac
1.67
0.67 time

D
282840
3200000
0.88
-0.12

0.645
6.614

2 lac
50000

129000
30700

EDCIF
(-)EDCOF

368240
320000
---------48240
------------G+ 48240 X 7
48240 + 37160
= 8.95%

Pg 18
Prob 14 assume COC at 150%
Year
.C.F
Coc at 150%

PV

(3000) 1.00

(3000)

9000

0.4

3600

3000

0.16

(480)
NPV =120

Assume r= 170%
Year
.C.F

Coc at 170%

PV

(3000)

1.000

(3000)

9000

0.37

3600

3000

0.137

(480)

NPV =81
BY APPLYING LINEAR INTERPREATION
+NPV X DIFF
IKR= + Rate + (_NPV )+ (-npv)
150% + 120x20
120+81
150 + 120x20
201
= 162%
15.
Case 1 NPV of the proposal

(P) assessment 10%

Year
C.F.
Coc
0
1
2
3
4.
5.

(1000)
(12000
(600)
(250)
2000
4000
NPV

1.000
0.909
0.826
0.751
0.623
0.621
1075

PV
(1000)
(109)
(496)
(158)
1246
2484

Year

CF

0
1
2
3
4
5

200
400
600
800
100
EDCIF
(-) Initial Inv.

At 20%
COC
0.909
0.826
0.751
0.083
0.621

PV
182
330
450
846
62
1571
1600
(29)

Conclusion At 10% COC project P is uncommended

Computation of IRR
Case P : at 10% COC NPV is +ve 1-75 Therefore assume COC at 25% to get
a ve value
Project : P-

Year
0
1
2
3.
4.
5.

CF
(1000)
(1200)
(600)
(250)
2000
4000

Assume
COC at 25%
1.000
0.80
0.640
0.512
0.41
0.33
NPV

PV
(1000)
(960)
(384)
(128)
820
1312
(340)

By applying linear interpretation technique the value of IRR = + ve rate +

NP x diff
+NPV + NPV
1075x 10
1075x340
IRR = 21.46%
Case 2:
Project Q At 10% assumed CPC NPV is ve, apply lower rate to get a +ve
value ie assume COC at 8%
Year
1
2
3.
4.
5.

CF
200
400
600
800
100
EDCIF
(-) EDCDF

COC AT 8%
0.926
0.857
0.794
0.735
0.681

By applying linear interpretation technique the value of

IRR = + rate + NPV
+NPV - NPV
8X60X2
60X29
IRR = 9.35%
Project P is recommended as IRR >COC
Based on IRR project P is recommended as its IRR > COC

PV
185
343
476
588
68
1660
1600
+60

NPV AT 20% coc

Year
0
1
2
3.
4.
5.

Year
1
2
3.
4.
5.

CF
(2000)
(1200)
(600)
(250)
(2000)
4000

CF

COC AT
20%
200
0.833
400
0.694
600
0.579
800
0.482
100
0.402
EDCIF
(-) Initial Inv.

COC AT 20%
1,000
0.833
0.695
0.579
0.482
0.402
NPV

PV at 20%
167
278
347
386
40
1218
1600

Pg 19 case I
Prob :16 computation PBP:
M pbp= 11 MILL + 19MILL (50+30) =2.63 YRS
32
N PBP 38 +(50-38) 1.55 yrs
22

PV at 20%
(2000)
(1000)
(416)
(145)
964
1608
11

AT 20% coc Proposal

P is again recommended

Computation of discounted PBP

Year
1
2
3
4

CF
11
19
32
37

CF
38
22
18
10

Atr 12%
0.892
0.797
0.712
0.636

PV(M)
9.823
15.143
22.784
23.532
71.282

PV(N)
33.934
17.534
12.816
6.36

Discounted PBP
Proposal M= 9.823 + 15.143 + 22.784 + 50=47.75
23.532
= 3.09 yrs.
N= 33.934+50-33.934 = 1.92 yrs
17.534
Conclusion :
If the proposals are mutually inclusive under PBP proposal N is recommended
as its pay backs earlier than proposal M
Under discounted PBP again proposal N is recommended as ti pay backs
earlier than M
Years
1
2
3
4

Prob M
11
19
32
37
E DCIF
(-) EDCOF
NOV

C.F
38
22
18
10
71.282
50.00
21.232

12%
0.,893
0.797
0.712
0.636
70.644
50.00
20.644

PV(M)
9.823
15.143
22.784
23.532

(PV(N)
33.934
17.534
12.816
6.36

As NPV of both the proposals are +ve the proposals are independent both
the proposal can be accepted of capital is not a constraint.
If projects are mutually exclusive and COC is 10%

Years
1
2
3
4

c.(m)
11
19
32
37

(c.1) N
38
22
18
10
EDCIF
(-) EDCOF
NPV

Dis (10%)
0.909
0.826
0.751
0.683

PV(M)
10
15.69
24.03
25.27
75.00
50.00
25.00

PV(N)
34.54
18.17
13.52
6.83
73.00
50.00
23.06

INTERS : If the project are mutually exclusive & 10% COC M is

recommended as it fetches more NPV
When projects are mutually exclusive & COC is 15%
Years
1
2
3
4

CF(M)
11
19
32
37

C.F(N)
38
22
18
10
NPV

COC At
15%
0.870
0.756
0.658
0.572

PV(M)
9.57
14.36
21.16
21.16
16.15

As the projects are mutually exclusive, N is recommended.

PV(N)
33.1
16.63
11.84
5.72
17.25