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Presented by
NIDHI SINGH
PRIYANKA PANDEY
SAPNA SHAHI
SHUBHI SRIVASTAVA
NITISH SINGH
 i 
¢ Aman ltd. Is a manufacturer of automative component.
¢ Its projects typically have a short life as it introduces
new models periodically.

¢ There are three projects a, b & c which needs to be

analysed by financial analyst that which project is
better.
¢ Project A is an extension of an existing line. its cash
flow decreases over time.
¢ Project B involves a new product. Its cash flow
increases over time.
¢ Project C will sponsor a pavilion at a trade fair. its cost
will give huge benefit for 1st yr .
r
r|r|rr
r|

year PROJECT A PROJECT B PROJECT C

0 (15000) (15000) (15000)

1 11000 3500 42000

2 7000 8000 (4000)

3 4800 13000 -
A 
 

 
 

 

!

¢ The payback period is the length of time

required to recover the initial cash outlay on
the project.
¢ Shorter payback period is most desirable.
¢ For ex. If a project involves a cash outlay of
8,00,000 and yield in 4 years then it will be
its payback period as total sum is recovered
in 4 years and its equal to initial cash outlay.
 i|"#r
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ri
¢ Discounted payback period helps to overcome the
limitations where conventional payback period does

not take into account the time value of money.

¢ In this method ,cash flows are first converted into
their present value (by applying suitable discounting
factors)and then added to ascertain the period of
time required to recover the initial outlay on project.
 A

 

 

 

 

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(

)% |*!

¢ PBA = 1+ 4000/7000
= 1+.57
=1.57
¢ PBB = 2+3500/13000
= 2+.27
= 2.27
  

 


years Discounted payback A Discounted payback B

0 (15000) (15000)

1 11000/1.12=9821.4 3500/1.12=3125

2 7000/(1.12)2=5600 8000/(1.12)2=6400

3 4800/(1.12)3=3428.57 13000/(1.12)3=9285.71
Discount payback
DPBA=1+5178.6/5600
=1+.92

=1.92
DPBB=2+5475/9285.71
= 2+.59
=2.59
  



+ 
!  






'#
!
The NPV of a project is the sum of the present

values of all the cash flows of the project .A project

is worthwhile if its NPV>0 otherwise not.
properties
¢ Net present values are additive.
¢ Intermediate cash flows are invested at the cost
of capital.
¢ NPV calculation permits time varying discount
rates.
 A|   

#
)'
(
)% 
|!
NPV of project A = sum where t=1 Ct/(1+r)n-initial investment

=11000/(1.12)+7000(1.12)2+4800(1.12)3-15000
=9821.4+5600+3428.57-15000
NPVA=18849.9- 15000
= 3849.97
NPVB=3500/1.12+8000/(1.12)2+13000/(1.12)3-15000
= 18810.71-15000
=3810.71
#
 ,-.//0
*
.1-///
*
..1
///

= 37500 ± 3200 ± 15000

= 25700
A 
  
'
 i!  




2i!
The internal rate of return of a project is the

discount rate which makes its NPV equal to 0. A

project is worthwhile if its IRR exceeds the cost
of capital.
Problems with IRR
¢ Non conventional cash flows
¢ Mutually exclusive projects
¢ Lending vs borrowing
 A|   

i'
(
)%
|!
IRR is the value of R which satisfies the following equations.

15000 = 11000/(1+r) + 7000/(1+r)2 + 4800/(1.28)3

Project A

1)Put R=28%
11000/(1+r) + 7000/(1+r)2 + 4800/(1.28)3
=8593.75+4268.29+2285.71
=15147.75

2) Put R=29%
11000/(1.29)+7000/(1.29)2+4800/(1.29)3
=8527.13+4216.87+2232.56
=14976.56



i
=28+.29/15147.75 - 14976.56
=28+.29/171.25

28.30 approx.
Project B) Put R=24%
= 3500/(1.24)+8000/(1.23) 2+13000/(1.24)3
=2822.58+5194.81+6806.28
=14823.67
2)Put r = 23%
=3500/(1.23)+8000/(1.24)2 +13000/(1.24)3
=2845.5+5298.01+6989.25
=15132.76


i

= 23+.24/15132.76-14823.67
=23+.24/309.0
=23.3 approx.
Part c:
A  i!  

  '
i+343+i #
!

¢ A percentage measure that overcomes the shortcomings of

the regular IRR is known as MIRR.
¢ IRR PROS AND CONS

Pros cons

¢ Closely related to NPV may lead to multiple

¢ Easy to understand rates of return

may result into incorrect decisions

comparing exclusively projects
 i
#|#

PROS CONS
¢ If the mutually exclusive if differs in size there
projects are of same size
NPV and IRR lead to same decision
irrespective of variations in life

is a possibility of conflict
A|   

i)'
(
)% | 2 
 

2
 
 ' 

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.5
 
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!
A)The future values of benefits when compounded 12%

= 11000* (1.12)2+ 7000*(1.12)+4800*(1.12)0

=13798.4+7840+4800
=26438.4
Pvc= TVA /(1+ MIRR)n
The MIRR is obtained as follows:
15000=26438.4/(1+MIRR)3
(1+ MIRR)3 = 26438.4/15000
1+MIRR = (1.76)1/3 = .586
MIRR=.586-1 = -.414 or 41.4%
 
+ 
'

'
 2

 

.5
= 3500 * (1.12)2+8000*(1.12)1+13000*(1.12)0

=4375+8960+13000
=26335.00
PVC = TVB/(1+MIRR)n
15000=26335/(1+MIRR)n
(1+MIRR)n= 26335/15000
=(1.75)1/3
MIRR=.583-1
=-0.417 or 41.7%

(
 
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+ 
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2

 
.5
= 42000 * (1.12)2+4000(1.12)1

=52684.8 + 4480
= 57164.8
PVC = TVc/1+MIRRn
The MIRR is obtained as follows:
15000= 57164.8/(1+MIRR)3
(1+MIRR)3 = 57164.8/15000
1+MIRR=(3.81)1/3
MIRR =1.270-1=.27 or 27%