PROJECT A PROJECT B

INVETSMENT 42K 45K

REVENUE (5yrs) 14K*5=70K 70K

NET INCOME 70K-42K=28K 70K-45K=25K

- Accept the project if the revenue is higher, but if it is both the same, look in the net income
- The best project is project kasi mataas net income at maliit ang funds na need.

PAYBACK PERIOD

– the amount of time required for a firm to recover its initial investment in a project, as calculated from
cash inflows. When the payback period is used to make accept–reject decisions, the following decision
criteria apply:

-If the payback period is less than the maximum acceptable payback period, accept the project.

- If the payback period is greater than the maximum acceptable payback period, reject the project.

ANNUITY (PROJECT A)

- 42k investment
- the payback period of project A is 3 years, bawi ang puhunan ng 3yeasr
- FORMULA : INITIAL INVESTMENT / ANNUAL CASH FLOW
- 42K/14K = 3 YEARS
MIXED STREAM (PROJECT B)

- 45k investment
- the payback period of project B is 2.5 years
- FORMULA: YEAR 1 CASH FLOW + YEAR 2 CASH FLOW
- 28k + 12k =40k
- FORMULA: KULANG NA AMMOUNT / YEAR 3 CASH FLOW
- 5k/10k = 0.5 years

PROJECT B is acceptable bc it has shorter payback period which is 2.5 years

Net Present Value (NPV)

– a sophisticated capital budgeting technique; found by subtracting a project’s initial investment from
the present value of its cash inflows discounted at a rate equal to the firm’s cost of capital. When NPV is
used to make accept–reject decisions, the decision criteria are as follows:

- If the NPV is greater than $0, accept the project.

- If the NPV is less than $0, reject the project.

ANNUITY

FORMULA:

PV =ANNUAL CASH FLOW * [1-1 /(1.10) ^years] / .10

Years – 5 years
Cost of capital – 10%

NPV = PV –INITIAL INVESTMENT

MIXED STREAM

FORMULA:

PV = YEAR CASH INFLOW * [1/(1+r)^n]

- Project A is acceptable bc it has a higher NPV

PROFITABILITY INDEX

PI= PV / INITIAL INVESTMENT

- Project A bc it has higher PI

-
INTERNAL RATE OF RETURN (IRR)

- Trial and error technique, u have to think of the percentage or rate that u can use to give a net
present value of 0
- 1985 = 19.85
- 2164 = 21.64
-

ANNUITY

FORMULA:

PV = ANNUAL CASH FLOW * [1-1 / (1.1985) ^5] / 0.1985

NPV = PV – INITIAL INVESTMENT

MIXED STREAM

FORMULA:

ANNUAL CASH FLOW * [1/(1.2164)^year]