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Wednesday, November 21, 2012


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 investment for alpha = 14%
For Beta:
Io= 20,000
i = initial investment for Beta = 12%
 
......................................
PV of Future Cash Flows of project ALPHA = 53428+ 63435 + 52956+ 37725
= 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 Cash Flows / Initial Investment Required
 

...................... 
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
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
 
...................... 
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:
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. 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

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