Sulabh international is evaluating a project whose expected cash flows are as follows:

a) What is the NPV of the project, if the discount rate is 14% for the entire period?
b) What is the NPV of the project, if the discount rate is 12% for year 1 and rises evert tear by 1%the entire period?

Part A) disc rate = 14% part b) disc rate as step function

Cash flows Cash flows
cost of capital year 14% PVCF ar 14% FV at 14% disc rate
Cash flows 0 -1,000,000 -1,000,000 -1,925,415 -1,000,000
1 100,000 87,719 168,896 100,000 12%
2 200,000 153,894 296,309 200,000 13%
3 300,000 202,491 389,880 300,000 14%
4 600,000 355,248 684,000 600,000 15%
5 300,000 155,811 300,000 300,000 16%
Net increase in cash 500000 -44,837 -86,330 500000
NPV = -44,837 -65,708
Benefit cost ratio 0.96 0.93
IRR = 12.46% 12.46%
Modified IRR = 10.69%
by 1%the entire period?

rate as step function

PVCF
-1,000,000
89,286
156,629
202,491
343,052
142,834
-65,708
What is the investment's IRR that involves a current outlay of Rs.300,000 and results in an annual cash flow of Rs.60

solution
Invt 300,000
ACF 60,000
accretion period 7 years

IRR = 9.20% 0.00

n an annual cash flow of Rs.60,000 for 7 years?
What is the IRRof the following cash flow stream?

year 162% PVCF ar 14%

Cash flows 0 -3,000 -3,000
1 9,000 3,438
2 -3,000 -438
Net increase in cash 3000 0
NPV = 0
Benefit cost ratio 1.00
IRR = 161.80%
If an equipment costs rs. 500,000 and lasts 8 years, what should be the minimum ACF before it is worthwhile to purc

solution
Invt 500,000
cost of capital 10%
Accretion period 8 years

Minimum ACF 93,722 -

fore it is worthwhile to purchase the equipment? Assume that WACC is 10%.
How much can be paid for a machine that brings in an ACF of rs. 25,000 for 10 years? Assume that the discount rate

solution
ACF 25,000
accretion period 10 years
discount rate 12%

Max. investment = ₹ 141,256

ume that the discount rate is 12%.
The cash flows associated with 3 projects P, Q, and R are given below:
Calculate the NPV for each project at discount rates of 0%, 5%, 10%, 15%, 20%, 25% and 30%. Present the results on

P Q R
Cash flows 0 -2000 -2000 -2000 -2000
1 1,400 500 500 1333.333 Chart Title
2 600 1,100 500 544.2177
₹400.00
3 400 900 1600 345.535
Net increase in cash 400 500 600 ₹200.00

₹0.00
5% ₹ 223.09 ₹ 251.38 ₹ 311.85 0% 5% 10% 15% 20%
10% ₹ 69.12 ₹ 39.82 ₹ 69.87 ( ₹200.00)
15% ₹ -65.92 ₹ -141.69 ₹ -135.12
( ₹400.00)
20% ₹ -185.19 ₹ -298.61 ₹ -310.19
25% ₹ -291.20 ₹ -435.20 ₹ -460.80 ( ₹600.00)
30% ₹ -385.98 ₹ -554.85 ₹ -591.26
( ₹800.00)
Col umn D Col umn E
and 30%. Present the results on a graph paper.

Chart Title

10% 15% 20% 25% 30% 35%

Col umn D Col umn E Col umn F

Phoenix company is considering two mutually exclusive investments, project P and Project Q. The expected cash flow
Year P Q
0 -1,000 -1,600 -1,000.00 -1,000.00 -1600
1 -2,000 200 -1,904.76 -1,772.08 167.3105
2 -600 400 -544.22 -471.04 279.9282
3 -250 600 -215.96 -173.90 351.262
4 2,000 800 1,645.40 1,232.66 391.7989
5 4,000 1,000 3,134.10 2,184.36 409.7005
a) construct the NPV profiles 1,114.57 - 0.00
b) What is the IRR of each project?
c) Which project would you choose if cost of capital is 10%? 20%?
d) What is each project's MIRR if cost of capital is 12%

Solution
a) disc rate NPVA NPVQ -600 Project P Project Q
5% 1,114.57 913.28 2,200 b) IRR 12.9% 19.5%
10% 347.83 530.52 1,000 c) At 10% Reject Accept
15% -224.98 225.46 850 At 20% Reject Reject
20% -655.99 -20.65 -1,200 d) MIRR 12.64% 17.12%
25% -982.08 -221.44 -3,000
30% -1,229.71 -386.94 0
35% -1,418.12 -524.64 0
crossover po 7.40%
Q. The expected cash flows of them are as follows:
Pjt P Pjt Q
outflows -1000 -1600
-1785.71 0
-478.316 0
-177.945 0
-3441.98 -1600
outflows
2240 314.70
4000 561.97
6240 752.64
896.00
1,000.00 Chart Title
3,525.32
1,500.00

1,000.00

500.00

-
0% 5% 10% 15% 20% 25% 30% 35% 40%
(500.00)

(1,000.00)

(1,500.00)

(2,000.00)
Col umn D Col umn E
Your company is considering two mutually exclusive projects, A and B. Project A involves an outlay of Rs.100 million
Project B calls for an outlay of Rs. 50 millions which will produce an expected cash inflow of Rs. 13 million p.a. for 6 y
a) Calculate NPV and IRR of each project.
b) What is the NPV and IRR of the differential project (project A over B)?

Solution
Pjt A Pjt B A over B
outlay -100 -50 -50
annual inflow 25 13 12
No. of years 6 6 6
discount rate 12% 12% 12%
₹ 0.00 ₹ 0.00 ₹ -3.85
metrics
NPV at 12% ₹ 2.79 ₹ 3.45 ₹ -0.66
IRR 12.98% 14.40% 14.40%
olves an outlay of Rs.100 million which will generate an expected cash inflow of Rs. 25 mil p.a. for 6 years.
nflow of Rs. 13 million p.a. for 6 years. The company's cost of capital is 12%.
 Your company is considering two projects, M and N, each of which requies an initial outlay of Rs. 50 million. The exp
Year Pjt M Pjt N
1 11 38 11 38 9.82
2 19 22 30 60 15.15
3 32 18 62 78 22.78
4 37 10 99 88 23.51
a) What is the payback period for M and N?
b) What is the discounted payback period for M and N if the cost of capital is 12%?
c) If the two projects are independent and cost of capital is 12%, which project(s) should the firm invest in?
d) If the two projects are mutaully exclusive and cost of capital is 10%, which project(s) should the firm invest in?
e) If the two projects are mutaully exclusive and cost of capital is 15%, which project(s) should the firm invest in?
f) If the cost of capital is 14%, what is the modified IRR of each project?

Solution
pjt A pjt B
Outlay -50 -50
a) PBP in years 2.625 1.55
b) Discounted PBP in ye 3.10 1.92
c) NPV at 12% 21.26 20.63 ===> Company can take up both
d) NPV at 10% 25.02 23.08 ===> Company needs to reject project N as it provides lesser NPV, even th
e) NPV at 15% 16.13 17.23 ===> Company needs to accept project N as it provides highest NPV.
l outlay of Rs. 50 million. The expected cash inflows from them are:

33.93 9.82 33.93

17.54 24.97 51.47
12.81 47.75 64.28
6.36 71.26 70.63

hould the firm invest in?

t(s) should the firm invest in?
t(s) should the firm invest in?

as it provides lesser NPV, even though it is positive.

as it provides highest NPV.
 Pjt A Pjt B
extension Modified New PVCF at Modified
of pdt line PVCF at 12% IRR product 12% IRR
Risk characteristics Similar similar
cost of capital year 12% 12%
Cash flows 0 -15000 -15,000 -21,074 -15000 -15,000 -21,074
1 11,000 9,821 13,798 3,500 3,125 4,390
2 7,000 5,580 7,840 8,000 6,378 8,960
3 4,800 3,417 4,800 13,000 9,253 13,000
Net increase in cash 7800 3,818 9500 3,756
NPV = 3,818 3,756
Benefit cost ratio 1.2546 1.2504
IRR = 28.83% 23.43%
Modified IRR = 20.79% 20.66%
PBP in years 1.57 1.928 2.27
r
5%
Ranking of: NPV IRR 10%
Project A 2 2 15%
Project B 3 3 20%
Project C 1 1 25%
30%
35%

₹8,000

₹6,000

₹4,000

₹2,000

₹0
0% 5%
( ₹2,000)

( ₹4,000)
 Pjt C
sponsoring Modified
a pavilion PVCF at 12% IRR
similar
12%
-15000 -15,000 -21,074 - - -15,000.00
42,000 37,500 52,685 7,500 6,729.98 425,451.82
-4,000 -3,189 -4,480 -1,000 -805.20 -410,451.82
- - -8,200 -5,924.78 0
23000 19,311
19,311 11.44% -0.00 -0.00
2.29
170.13% -90.13%
60.82%
1,764,000,000
A B C -240000000
₹ 5,972 ₹ 6,819 ₹ 21,372 1,524,000,000
₹ 4,391 ₹ 4,560 ₹ 19,876 39038.442592
₹ 3,014 ₹ 2,640 ₹ 18,497
₹ 1,806 ₹ 995 ₹ 17,222
₹ 738 ₹ -424 ₹ 16,040
₹ -212 ₹ -1,657 ₹ 14,941
₹ -1,060 ₹ -2,734 ₹ 13,916

Chart Title
₹8,000

₹6,000

₹4,000

₹2,000

₹0
0% 5% 10% 15% 20% 25% 30% 35% 40%
( ₹2,000)

( ₹4,000)
Col umn J Col umn K
 project T project F T with repetition
cost of capital 10% 10% 10%
outlay -100,000 -100,000 -100,000
cashflows Year
1 60,000 33,500 60,000
2 60,000 33,500 -40,000
3 33,500 60,000
4 33,500 60,000

1) NPV w/o replication 4,132.23 6,190.49

2) Equivalent annual annuity 2,380.95 1,952.92 <== T is better
3) NPV with replication 6,190.49 7,547.30 ==> T is better as it provides high
4) NPV of stage at end of yr 2 ₹ -867.77
NPV with replication ₹ 3,415.07 6,190.49 <== F is better
etter as it provides higher NPV with repetition
 Year ACF eoy salvage value PVCF at 10%
0 -5,000 5,000
1 2,100 3,100 1909.091
2 2,000 2,000 1652.893
3 1,750 0 1314.801

NPV if discontinued at end of year 1 = -272.73

NPV if discontinued at end of year 2 = 214.88 <-- year with highest NPV.
NPV if discontinued at end of year 3 = -123.22

Project's optimal economic life is 2 years.