written 5.2 years ago by
ishandaftardar
• 170
|
modified 3.9 years ago
by
prashantsaini
• 0
|
| Year | 0 | 1 | 2 | 3 | 4 | 5 |
|---|---|---|---|---|---|---|
| Cash Flow | 10,00,000 | 2,00,000 | 2,00,000 | 3,00,000 | 3,00,000 | 3,50,000 |
Find:-
i) If the project is acceptable by NPV method considering discount rate as 10%.
ii) For the same project, the discount rate by IRR method.
|
written 5.1 years ago by
ishandaftardar
• 170
|
Given:
r = 10%
1. NPV (Net Present Value) Method
NPV = - CF/(1+r)^0 + CF/(1+r)^1 + CF/(1+r)^2 ..... CF/(1+r)^n
and 4 others joined a min ago.
= -10,00,000/ (1+0.10)^0 + 2,00,000/(1+0.1)^1 + 2,00,000/(1+0.1)^2 + 3,00,000/(1+0.1)^3 + 3,00,000/(1+0.1)^4 + 3,50,000/(1+0.1)^5
= -10,00,000 + 181818.18 + 165289.25 + 225394.44 + 204904.03 + 217322.46
NPV = Rs - 5271.64
Therefore, the project is unacceptable as the present value is negative. It is not feasible.
2. IRR ( Internal Rate of Return) Method:
In IRR method rate of return is unknown. So we have to find the value of r for which the difference in the present value and its right hand side is 0
Present value = CF/(1+r)^1 + CF/(1+r)^2 ..... CF/(1+r)^n.
The present value of cash flow is Rs 10,00,000.
Assuming r= 8% and r=10% , we can generate a table as follows:
| Year | Cash Flow (CF) in Rupees | CF/(1+r)^n where r=8% | CF/(1+r)^n where r = 10% |
|---|---|---|---|
| 0 | -10,00,000 | -10,00,000 | -10,00,000 |
| 1 | 2,00,000 | 185185.18 | 181818.18 |
| 2 | 2,00,000 | 171467.76 | 165289.25 |
| 3 | 3,00,000 | 238149.67 | 225394.44 |
| 4 | 3,00,000 | 220508.95 | 204904.03 |
| 5 | 3,50,000 | 238204.12 | 217322.46 |
| Total | 53515.68 | -5271.64 |
Now, present value for r=8% is Rs 53515.68 and for r=10% is Rs -5271.64. The actual value of IRR lies between the 2 values.
We can find the actual r by interpolation.
(R - 8 ) / (10 - 8 ) = (0 - (-5271.64)) / (53515.68 - (-5271.64))
R = 8.18 %