NET PRESENT VALUE

Calculate NPV of the two projects and suggest which of the two should be accepted assuming disc
What project will you sugggest to the management and why?
Project X
Initial investment ₱40,000.00
Estimated Life 5 years

Cash Inflows
Year 1 2
Project X ₱10,000.00 ₱20,000.00
Project Y ₱40,000.00 ₱20,000.00

Project X DF @
Year Cash Flow 10% Present Value
0 -₱40,000.00 1 -₱40,000.00
1 ₱10,000.00 0.909 ₱9,090.91 ₱9,090.91
2 ₱20,000.00 0.826 ₱16,528.93 ₱16,528.93
3 ₱20,000.00 0.751 ₱15,026.30 ₱15,026.30
4 ₱6,000.00 0.683 ₱4,098.08 ₱4,098.08
5 ₱4,000.00 0.621 ₱2,483.69 ₱2,483.69
NPV ₱7,227.90
Simplified Formula: NPV ₱7,227.90

Answer: We should accept project X since it has a higher net present

IRR 18%
cepted assuming discount rate at 10%

Project Y
₱60,000.00
5 years

3 4 5
₱20,000.00 ₱6,000.00 ₱4,000.00
₱10,000.00 ₱6,000.00 ₱4,000.00

Project Y DF @
Year Cash Flow 10% Present Value
0 -₱60,000.00 1 -₱60,000.00
1 ₱40,000.00 0.909 ₱36,363.64
2 ₱20,000.00 0.826 ₱16,528.93
3 ₱10,000.00 0.751 ₱7,513.15
4 ₱6,000.00 0.683 ₱4,098.08
5 ₱4,000.00 0.621 ₱2,483.69
NPV ₱6,987.48
₱6,987.48

gher net present value of 7, 227.90 versus project Y which has 6.972 NPV.

IRR 17%
 Discount factor: =1/(1*(1+DISCOUNT RATE)^PERIOD)
Present Value: =CASHFLOW/(1+DISCOUNT RATE)^PERIOD
NET PRESENT VALUE =NPV(DISCOUNT RATE,CASHFLOWS:CASHFLOWS)-INITIAL INVESTMENT

2 NPV.
 PROFITABILTY INDEX

Let’s take the example of Project A whose cash flows are depicted below: -

Initial Investment
Initial Investment (Cash Outflow hence -ve)
Year 1 Cash Flow
Year 2 Cash Flow
Year 3 Cash Flow
Year 4 Cash Flow
Year 5 Cash Flow
Discounting Factor

Net Present Value is calculated as:

Net Present Value

Profitability Index is calculated using given below formula

Profitability Index = (Net Present Value + Initial Investment) / Initial Investment

Profitability Index

Answer:
oject A whose cash flows are depicted below: -

₱30,000.00 Present Value: =CASHFLOW/(1+DISCOUNT RATE

-₱30,000.00
₱5,000.00
₱10,000.00
₱15,000.00
₱20,000.00
₱25,000.00
30%

₱251.22

) / Initial Investment

₱1.01

Since the profitability index is greater than one, this project should be accepted.
SHFLOW/(1+DISCOUNT RATE)^PERIOD

should be accepted.
INTERNAL RATE OF RETURN

A machine can reduce annual cost by 40,000. The cost of the machine is 223,000 and the useful life is 15 years with zero resid

Required:

1. Compute internal rate of return of the machine.

2. Is it an acceptable investment if cost of capital is 16%?

Internal rate of return factor = Net annual cash inflow/Investment required

=223,000/40,000
life is 15 years with zero residual value.