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  • 6000 o Invested in Machinery The Cash Inflow 2000 and DF 18%A, B 20% (18% 3.127 20% 2.99

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    REKHAmkothari
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    The document provides information and formulas for calculating the internal rate of return (IRR) and profitability index (PI) of investments. It includes an example calculation of IRR using cash flows of $2000 per year for 6 years and shows the discount factors and present values at discount rates of 18% and 20% to find the IRR of 19.854%. It also gives a brief example of calculating PI as 1.44 or 144% based on a project cost of $100,000 and total present value of cash inflows of $144,410 at a discount rate of 10%.

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    Irr

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    The document provides information and formulas for calculating the internal rate of return (IRR) and profitability index (PI) of investments. It includes an example calculation of IRR using cash flows of $2000 per year for 6 years and shows the discount factors and present values at discount rates of 18% and 20% to find the IRR of 19.854%. It also gives a brief example of calculating PI as 1.44 or 144% based on a project cost of $100,000 and total present value of cash inflows of $144,410 at a discount rate of 10%.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
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    9 views2 pages

    6000 o Invested in Machinery The Cash Inflow 2000 and DF 18%A, B 20% (18% 3.127 20% 2.99

    Uploaded by

    REKHAmkothari
    The document provides information and formulas for calculating the internal rate of return (IRR) and profitability index (PI) of investments. It includes an example calculation of IRR using cash flows of $2000 per year for 6 years and shows the discount factors and present values at discount rates of 18% and 20% to find the IRR of 19.854%. It also gives a brief example of calculating PI as 1.44 or 144% based on a project cost of $100,000 and total present value of cash inflows of $144,410 at a discount rate of 10%.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
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    of 2

    Internal rate return

    Cash inflow =cash outflow

    5000

    6years 20%/

    Factor = original investment

    Cash flow per year

    6000/2000=3

    6000 =o invested in machinery the cash inflow 2000 and df 18%A= ,B=20%(18% 3.127

    20% 2.99

    6000/2000=3

    IRR= A+C-O/C-DxB-A

    A= Discount factor of lower trail rate

    B= Disc factor of higher trail rat

    C= PV Cash inflow at lower trail rate

    D= PV cash inflow at higher trail rate

    O= Original cash inflow

    Years Ci Df Pv ci @18% Df PVci @20%


    1 2000 0.847 1694 .833 1666
    2 2000 .717 1436 .694 1388
    3 2000 .609 1218 .579 1158
    4 2000 .516 1032 .482 964
    5 2000 .437 874 .402 804
    Total 6254=C 5980=D

    6254-6000 x(20-18)

    IRR = 18+ 6254-5980

    =18+252/272*3

    =18+1.852

    =19854
    Profitability index

    Total pv of cash inflow at10% = 108273

    Original investment = 100000

    PI = Total PV cashinflow/original investment

    = 144410/100000

    1.44or 144%

    Questions & ans

    1. A project cost rs16000 & is expected to generate cash inflow of rs.4000 each for five years.

    Calculate IRR. Present Value of rs.1 at varying discount for a period of 5 years is given below:

    Years 7%=A 8%=B 9%


    1 0.9346 .9259 .9174
    2 .8743 .8573 .8417
    3 .8163 .7938 .7722
    4 .7629 .7350 .7084
    5 .7130 .6806 .6499
    Total 4.1011 3.9926 3.8896

    Solution:

    IRR= A+C-O/C-D*(B-A)

    Step 1 - Factor = Original investment /Annual cashinflow= 16000/4000=4

    Step 2 : Calculation of total PV

    C= PV of cash inflow at 7%= 4000x4.1011=16400

    D= PV of cash inflow @8%= 15970

    IRR=7+164000-16000/16400-15970+(8-7)

    7+400/430*1

    =7+.93

    =7.93

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