FIN622
Assignment 1 Fall 2012 Solution
Tuesday, November 20, 2012 Edit This
Net Present Value (NPV)
NPV = -Io + CF1 / (1+i)^1 + CF2 / (1+i)^2 + CF3 / (1+i)^3 + CF4 / (1+i)^4 +…….+ ∞
For Alpha:
Io= 20,000
i = initial
For Beta:
Io= 20,000
i = initial investment for Beta = 12%
......................................
PV of Future
= 207547
PI= 207547/200000
ye calculation apni kr laina...main ny rounded kiya howa hy.... same isi tarah BETA ki b calculate krni hy.....just intial investment ki amount less nahi krni....balky intial investment ko divide krna hy
......................
Net Present Value (NPV)
NPV = -Io + CF1 / (1+i)^1 + CF2 / (1+i)^2 + CF3 / (1+i)^3 + CF4 / (1+i)^4 +…….+ ∞
For Alpha:
Io= 20,000
i = initial investment for alpha = 14%
For Beta:
Io= 20,000
i = initial investment for Beta = 12%
......................
Profitability Index (PI):
Profitability Index = PV of Future Net
......................
Net Present Value (NPV)
NPV = -Io + CF1 / (1+i)^1 + CF2 / (1+i)^2 + CF3 / (1+i)^3 + CF4 / (1+i)^4 +…….+ ∞
For Alpha:
Io= 20,000
i = initial investment for alpha = 14%
For Beta:
Io= 20,000
i = initial investment for Beta = 12%
Profitability Index (PI):
Profitability Index = PV of Future Net Cash Flows / Initial Investment Required
NPV = -Io + CF1 / (1+i)^1 + CF2 / (1+i)^2 + CF3 / (1+i)^3 + CF4 / (1+i)^4 +…….+ ∞
For Alpha:
Io= 20,000
i = initial
For Beta:
Io= 20,000
i = initial investment for Beta = 12%
......................................
PV of Future
= 207547
PI= 207547/200000
ye calculation apni kr laina...main ny rounded kiya howa hy.... same isi tarah BETA ki b calculate krni hy.....just intial investment ki amount less nahi krni....balky intial investment ko divide krna hy
......................
Net Present Value (NPV)
NPV = -Io + CF1 / (1+i)^1 + CF2 / (1+i)^2 + CF3 / (1+i)^3 + CF4 / (1+i)^4 +…….+ ∞
For Alpha:
Io= 20,000
i = initial investment for alpha = 14%
For Beta:
Io= 20,000
i = initial investment for Beta = 12%
......................
Profitability Index (PI):
Profitability Index = PV of Future Net
......................
Net Present Value (NPV)
NPV = -Io + CF1 / (1+i)^1 + CF2 / (1+i)^2 + CF3 / (1+i)^3 + CF4 / (1+i)^4 +…….+ ∞
For Alpha:
Io= 20,000
i = initial investment for alpha = 14%
For Beta:
Io= 20,000
i = initial investment for Beta = 12%
Profitability Index (PI):
Profitability Index = PV of Future Net Cash Flows / Initial Investment Required
|
Year Project Alpha
|
||||
|
Years
|
End Rs.(000)
|
FVIF
12.3%=1/(1.123)^t |
PV
|
PI
|
|
-200,000
|
1.000
|
-200000
|
-0.85
|
|
|
1
|
60,000
|
1.123
|
67380
|
2.83
|
|
2
|
80,000
|
1.261
|
100890.32
|
2.12
|
|
3
|
75,000
|
1.416
|
106218.59
|
2.27
|
|
4
|
60,000
|
1.590
|
95426.78128
|
2.83
|
|
Total
|
75,000
|
169915.6913
|
||
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Project Beta
|
||||
|
Years
|
End Rs.(000)
|
FVIF
12.3%=1/(1.123)^t |
PV
|
PI
|
|
-200,000
|
1.000
|
-200000
|
-0.851
|
|
|
1
|
55,000
|
1.123
|
61765
|
3.093
|
|
2
|
65,000
|
1.261
|
81973.385
|
2.617
|
|
3
|
70,000
|
1.416
|
99137.35069
|
2.430
|
|
4
|
80,000
|
1.590
|
127235.7084
|
2.126
|
|
Total
|
NPV
|
170111.4441
|
||
PV of Future Cash Flows of project ALPHA =
53428+ 63435 + 52956+ 37725
= 207547
PI= 207547/200000
......................
= 207547
PI= 207547/200000
......................
Answers are
1: Net present values (NPV):
Alpha: NPV = 7545.63
Beta: NPV = 243.8
Profitability index (PI):
Alpha: PI = 1.0377
Beta: PI = 1.0012
2) NPV of Alpha is higher, it is favorable
3) Profitability index of Alpha is higher
4) IRR of Alpha is higher so it is favorable project.
......................
Answer 4:
Alpha: NPV = 7545.63
Beta: NPV = 243.8
Profitability index (PI):
Alpha: PI = 1.0377
Beta: PI = 1.0012
2) NPV of Alpha is higher, it is favorable
3) Profitability index of Alpha is higher
4) IRR of Alpha is higher so it is favorable project.
......................
Answer 4:
|
PROJECT ALPHA
|
|||||||
|
Year End
|
Project Alpha
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IRR
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IRR+1
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(IRR+1)^T
|
|||
|
0
|
-200000
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14.00%
|
1 + 14% = 1.14
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(1.14)^0
|
=
|
1.000
|
(200,000.00)
|
|
1
|
60000
|
14.00%
|
1 + 14% = 1.14
|
(1.14)^1
|
=
|
1.140
|
52,631.58
|
|
2
|
80000
|
14.00%
|
1 + 14% = 1.14
|
(1.14)^2
|
=
|
1.300
|
61,557.40
|
|
3
|
75000
|
14.00%
|
1 + 14% = 1.14
|
(1.14)^3
|
=
|
1.482
|
50,622.86
|
|
4
|
60000
|
14.00%
|
1 + 14% = 1.14
|
(1.14)^4
|
=
|
1.689
|
35,524.82
|
|
TOTAL NPV
|
336.66
|
||||||
|
PROJECT Beta
|
|||||||
|
Year End
|
Project Alpha
|
IRR
|
IRR+1
|
(IRR+1)^T
|
|||
|
0
|
-200000
|
12.00%
|
1 + 12% = 1.12
|
(1.12)^0
|
=
|
1.000
|
(200,000.00)
|
|
1
|
55000
|
12.00%
|
1 + 12% = 1.12
|
(1.12)^1
|
=
|
1.120
|
49,107.14
|
|
2
|
65000
|
12.00%
|
1 + 12% = 1.12
|
(1.12)^2
|
=
|
1.254
|
51,817.60
|
|
3
|
70000
|
12.00%
|
1 + 12% = 1.12
|
(1.12)^3
|
=
|
1.405
|
49,824.62
|
|
4
|
80000
|
12.00%
|
1 + 12% = 1.12
|
(1.12)^4
|
=
|
1.574
|
50,841.45
|
|
TOTAL NPV
|
1,590.81
|
||||||
Using IRR criterion, project Beta IRR is higher than Project Alpha. So, Select Project Beta. Answer 4:
|
PROJECT ALPHA
|
|||||||
|
Year End
|
Project Alpha
|
IRR
|
IRR+1
|
(IRR+1)^T
|
NPV of Cash Flow
|
||
|
0
|
-200000
|
14.00%
|
1 + 14% = 1.14
|
(1.14)^0
|
=
|
1.000
|
(200,000.00)
|
|
1
|
60000
|
14.00%
|
1 + 14% = 1.14
|
(1.14)^1
|
=
|
1.140
|
52,631.58
|
|
2
|
80000
|
14.00%
|
1 + 14% = 1.14
|
(1.14)^2
|
=
|
1.300
|
61,557.40
|
|
3
|
75000
|
14.00%
|
1 + 14% = 1.14
|
(1.14)^3
|
=
|
1.482
|
50,622.86
|
|
4
|
60000
|
14.00%
|
1 + 14% = 1.14
|
(1.14)^4
|
=
|
1.689
|
35,524.82
|
|
TOTAL NPV
|
336.66
|
||||||
|
PROJECT Beta
|
|||||||
|
Year End
|
Project Alpha
|
IRR
|
IRR+1
|
(IRR+1)^T
|
NPV of Cash Flow
|
||
|
0
|
-200000
|
12.00%
|
1 + 12% = 1.12
|
(1.12)^0
|
=
|
1.000
|
(200,000.00)
|
|
1
|
55000
|
12.00%
|
1 + 12% = 1.12
|
(1.12)^1
|
=
|
1.120
|
49,107.14
|
|
2
|
65000
|
12.00%
|
1 + 12% = 1.12
|
(1.12)^2
|
=
|
1.254
|
51,817.60
|
|
3
|
70000
|
12.00%
|
1 + 12% = 1.12
|
(1.12)^3
|
=
|
1.405
|
49,824.62
|
|
4
|
80000
|
12.00%
|
1 + 12% = 1.12
|
(1.12)^4
|
=
|
1.574
|
50,841.45
|
|
TOTAL NPV
|
1,590.81
|
||||||
Using IRR criterion, project Beta IRR is higher than Project Alpha. So, Select Project Beta