KANDIVLI EDUCATION SOCIETY’S BK SHROFF COLLEGE OF

ARTS & MH SHROFF COLLEGE OF COMMERCE

“CORPORATE FINANCE”

“capital budgeting and time value of money”

A Project Submitted in Partial Fulfilment of the Requirements For

Semester III of the B.M.S. Course.

Date of Submission – 8th November 2020

Teacher In-charge – AVINASH SINGH

HIMANI SHAH
SYBMS – B
Roll no- 45
Phone. No.:9769077928
Mail: hkshah173@gmail.com
Q1. An investment in project P requires cash outlay of Rs 400000. The opportunity cost of capital to
be used is 9%. The expected net cash flows of the project are given as follows:
Year End Project P (Rs)
1 120000
2 150000
3 100000
4 130000
5 150000

Calculate:
Payback period, discounted payback period
NPV, PI and IRR.

Solution:

Payback Period:

Year End Project P (Rs) Cumulative Cash Flows

(Amount to Be Recovered)
0 (400000) (400000)
1 120000 (280000)
2 150000 (130000)
3 100000 (30000)
4 130000
5 150000

PBP = 3 years + (30000/130000) *1 year

= 3 years + 0.23 years
= 3.23 years

NPV, PI Method

 Discount rate = 9%-------- DF =1/(1+i) ^n, I=r/100

Year end (1) Project P (Rs) DF=1/(1+i) ^n @9% (3) PV or DV of

CFAT (2) cash flows (4) =
(2) *(3)
0 (400000) 1/ (1+1.09) ^0 = 1 (400000)
1 120000 0.917 110040
2 150000 0.841 126150
3 100000 0.772 77200
4 130000 0.708 92040
5 150000 0.649 97350
Total 502780

NPV = PV of cash inflows – PV of cash outflows = Rs 502780 – Rs 400000 = Rs 102780

PI = PV of cash inflows/PV of cash outflows = Rs 502780/Rs 400000 = 1.256
Discounted Payback Period Method
 Year end (1) Project P DF = 1/(1+i) ^n PV or DV of Cumulative
(Rs) CFAT @9% (3) cash flows (4) = discounted
(2) (2) *(3) cash flows
0 (400000) 1 (400000) (400000)
1 120000 0.917 110040 (289960)
2 150000 0.841 126150 (163810)
3 100000 0.772 77200 (86610)
4 130000 0.708 92040
5 150000 0.649 97350
Total 502780

Discounted PBP = 3 years + [ 86610/92049] *1

= 3 years + 0.94 years
= 3.94 years.

IRR
Year end (1) Project P (Rs) DF = 1/(1+i) ^n PV or DV of cash
CFAT (2) @9% (3) flows (4) = (2) *(3)
0 (400000) 1 (400000)
1 120000 0.917 110040
2 150000 0.841 126150
3 100000 0.772 77200
4 130000 0.708 92040
5 150000 0.649 97350
Total 502780

NPV = PV of cash inflows – PV of cash outflows

= Rs 502780 – Rs 400000
= Rs 102780

Disc rate = 9%, NPV = Rs 102780

Disc rate =? NPV = 0
When Disc Rate Is 19%,
 Year end (1) Project P (Rs) CFAT DF = 1/(1+i) ^n PV or DV of cash
(2) @19% (3) flows (4) = (2) *(3)
0 (400000) 1/ (1+0.19) ^0 = 1 (400000)
1 120000 0.840 100800
2 150000 0.706 105900
3 100000 0.593 59300
4 130000 0.498 64740
5 150000 0.419 62850
Total 393590

NPV = PV of cash inflows – PV of cash outflows

= Rs 393590 – Rs 400000
= (Rs 6410)

LDR = 9% NPV = 102780

HDR = 19% NPV = (6410)
IRR = LDR + [HDR - LDR] * positive NPV/positive NPV - negative NPV
= 9% + [19% - 9%] * 102780/102780+6410
= 9% + [10%] * 0.941
= 18.41%

Q2. To receive Rs 2000, 3000, and 4000 from a bank at the end of every year for the next three
years. Find out what amount Mr. p should deposit in a bank. Given that bank is offering interest rate
@9% pa.

Year Future Value Present Value

Year 0 end = year 1 start
Year 1 end = year 2 start 2000 1834.86
Year 2 end = year 3 start 3000 2525.03
Year 3 end 4000 3088.80

I = r/100

Year 1 end
Present value = future value/ (1+i) ^n
= 2000/ (1.09) ^1
= 1834.86

Year 2 End
Present value = future value/(1+i) ^n
= 3000/ (1.09) ^2
= 2525.03
Year 3 End
Present value = future value/(1+i) ^n
= 4000/ (1.09) ^3
= 3088.80