RIDM (RD30011) - CRDIST - PKS - Week 5-6

CENTER FOR RURAL DEVELOPMENT AND INNOVATIVE
SUSTAINABLE TECHNOLOGY (CRDIST)

IIT KHARAGPUR
Rural Infrastructure Development and Management

[RD30011; Credit 3: 3-0-0]
Spring Semester 2023-2024
By :
Dr. P. K. Singh
Assistant Professor
CRDIST, IIT KGP
ARF lab: https://arflab.co.in/
Takeaway concepts_ Session 8-9-10
❑ Concept of Rural Infra Project, Cash Flows Mapping

❑ Role of Finance; Financial Evaluation
❑ Risk Return Concept
❑ Time Value of Money; Concept and Numerical
▪ Compounding, discounting, Semi-annually, quarterly etc.
▪ Cash inflows AND cash outflows
▪ PV, FV
▪ Annuity (Ordinary, Annuity due)
▪ Inflation
▪ Inflation impact on time value of money
o Real interest rate; real cash flow
o Nominal interest rate; nominal cash flow
❑ Basics of Financial Statements
Center for Rural Development and Innovative Sustainable Technology (CRDIST); Dr. P.K.Singh 9-Feb-24
Perspective
Food
Input Agriculture Producers Whole seller/ Marketing
Processor Retailer Consumers
Supply Production Group Distributer Companies
Capital Intensive Segment; Profit Centric Segments
C1 C2 C3 C4 C5
Agro Processing
Producer Centre
Rate of Return (i)
Group/Start [300 Lakhs] 0 1 2 3 4 5 years
Up/Govt/Private
PV; FV; Annuity; Annuity Due; NPV; Inflation

B/S; P/L; Cash Flow Statement
Financial Statements
Three Important Financial Statements
◼ The Balance Sheet:
◼ Provides a snapshot view of a
company’s assets and liabilities
◼ The Balance Sheet is as of a ◼ The Cash Flow Statement:
particular date. ◼ Is an analysis of the sources and uses
of cash by the firm over an
◼ The Income Statement: accounting period
◼ Provides a summary of a firm’s ◼ Summarizes operating, investing, and
revenues and expenses financing cash flows
◼ The Income Statement is over a
specific accounting period, usually a
quarter or a year.
Integrated Financial Statements
Source: Don Hofstrand; IOWA STATE UNIVERSITY
The Balance Sheet
◼ Asset - Anything a company owns that

has value.
◼ Liability - A firm’s financial obligation.
◼ Equity - An ownership interest in the

company.
◼ The fundamental accounting identity:
Assets = Liabilities + Equity
The Balance Sheet (contd.)
Current Assets Current Liabilities

❑ Livestock Inventory
❑ Debt payable within one year
❑ Crop Inventory
❑ Current portion of term debt
❑ Purchase Inputs
❑ Accrued Interest
❑ Prepaid Insurance
❑ Accounts Payable
❑ Cash Invested in Growing Crops
❑ Account Receivables?
❑ Other Assets
Fixed Assets Long Term Liabilities

❑ Investment in FPCs/Cooperatives ❑ Long Term Debt
❑ Land and Buildings
❑ Farm Equipment's
❑ Breeding Animal Owners Equity
The Income Statement (P/L Account)
◼ Income - The difference between a company’s revenues

and expenses, used to pay dividends to stockholders or
kept as retained earnings within the company to finance
future growth.
Net Income = Revenues – Expenses

= Dividends + Retained earnings
Sample Condensed Income Statement
Cash Flow Analysis
◼ Net Income does not equal ◼ Cash Flow represents all income
cash flow. realized in cash form.
◼ Net income contains non- ◼ Adjusting net income for non-cash
cash items. items yields Operating Cash Flow.
◼ Non-cash items are income ◼ Investment Cash Flow includes
and expenses not realized in any purchases or sales of fixed
cash form. assets and investments.
◼ Depreciation can be a ◼ Financing Cash Flow includes
significant non-cash item. funds raised by issuing securities,
or expended by repurchasing
outstanding securities.
Sample Condensed Cash Flow Statement
What is Cash flow analysis?
◼ Cashflow is the movement of money in and out of your

business. The process includes:
◼ Inflow
which comes from operations such as the sale of goods
and services, loans, lines of credit, and asset sales.
◼ Outflowwhich occurs during operations such as business
expenditures, loan payments, and business purchases.
Cash flow analysis (contd.)
◼ It's crucial to balance these two figures and maintain a reasonable balance of cash at all
times.
◼ An effective cash flow system will help you manage funds to cover operational costs and
bills and help you foresee potential problems in the future.
◼ Profit and loss statements/income statements can be used to determine projections for
future cash flow trends of your business.
◼ These financial documents are instrumental in making cash flow projections. However, a
cash flow statement serves an important and independent purpose - it accounts for non-
cash items and expenses to adjust profit figures.
◼ Cash flow analysis statements display not only changes over time, but also available net
cash.
Cash flow analysis statements are generally
separated into three parts:
Operating activities: This section evaluates net income and loses of a business. By assessing sales and
business expenditures, all income from non-cash items is adjusted to incorporate inflows and outflows of
cash transactions to determine a net figure.
Investment activities: This section reports inflows and outflows from purchases and sales of long-term
business investments such as property, assets, equipment, and securities. For example - if your bakery
business purchases an additional piece of kitchen equipment, this would be considered an investment
and accounted for as an outflow of cash. If your business then sold equipment that was no longer
needed, this would be considered an inflow of cash.
Financing activities: This section accounts for the cash flow trends of all money that is related to
financing your business. For example: if you received a loan for your small business, the loan itself
would be considered an inflow of cash. Loan payments would be considered an outflow of cash, and both
would be recorded in this part of the cash flow analysis statement.
How are these three financial
statements inter-related?
STARTING CASH
X crores CASH AND BANK BALANCE, 2008, B/S
BALANCE
Raw Material Expenses Cash Flow from Operating

Rent Expenses Activities
Salaries Expenses
Marketing expenses
Cash Flow from Investing

Equipment
Furniture Activities
Interiors
Loans Cash Flow from Financing

Interest Activities
ENDING CASH
Y crores CASH AND BANK BALANCE, 2009 B/S
BALANCE
Cash Flow from Investment
Activities
Financeability
Profitability
Liquidity
Example
Net Income
Cash Flow
Capital Budgeting Instruments
Perspective
Food
C1 C2 C3 C4 C5
Agro Processing
Producer Centre
Rate of Return (i)
Up/Govt/Private
Whether We should go for this Infra Project?
Payback Period
 A criteria used in capital budgeting.

 Defined as the number of years required to recover initial cash investment
 Unlike net present value method and internal rate of return method, payback method
does not consider the present value of cash flows.
 Under this method, an investment project is accepted or rejected on the basis of
payback period.
 Payback period means the period of time that a project requires to recover the
money invested
Payback Period
 The payback period of a project is expressed in years and is computed using the
following formula:
 Formula of payback period:
 According to this method, the project that promises a quick recovery of initial
investment is considered desirable. If the payback period of a project computed by
the above formula is shorter than or equal to the management’s maximum desired
payback period, the project is accepted otherwise it is rejected.
 For example, if a company wants to recoup the cost of a machine within 5 years of purchase,
the maximum desired payback period of the company would be 5 years. The purchase of
machine would be desirable if it promises a payback period of 5 years or less.
Payback Period
Initial Investment in project 10000
Ca s h inflows after tax

Year 1 1000
Year 2 1000
Year 3 5000
Year 4 4000
Year 5 5000
Payback 3.75
◼ It will take 3 years to recover 7000 and the 3/4th of the 4th year to recover the remaining
3000. Therefore the payback in this example is 3.75 year
Example
 Due to increased demand, the management of X Agro Company is considering to purchase a new
equipment to increase the production and revenues. The useful life of the equipment is 10 years and the
company’s maximum desired payback period is 4 years. The inflow and outflow of cash associated with
the new equipment is given below:
✓ The initial cost of equipment $37,500
✓ Annual cash inflow:
✓ Sales $75,000
✓ Annual cash outflow:
✓ Cost of ingredients $45,000
✓ Salaries expenses $13,500
✓ Maintenance expenses $1,500
✓ Non cash expenses:
✓ Depreciation $5,000
 Required: Should X Agro Company purchase the new equipment? Use payback method for your answer.
 Step 1: In order to compute the payback period of the equipment, we need to workout the net annual
cash inflow by deducting the total of cash outflow from the total of cash inflow associated with the
equipment.
◼ Computation of net annual cash inflow:

◼ $75,000 – ($45,000 + $13,500 + $1,500)=?
 Step 2: Now, the amount of investment required to purchase the equipment would be divided by the
amount of net annual cash inflow (computed in step 1) to find the payback period of the equipment.
◼ = $37,500/$15,00 =?
Depreciation is a non cash expense and therefore has been ignored.
Example 2
◼ An investment of $200,000 is expected to generate the following cash flows in six years:
Year Net cash flow

1 $30,000
2 $40,000
3 $60,000
4 $70,000
5 $55,000
6 $45,000
◼ Compute the payback period for the investment?
◼ Should the investment be made if management wants to recover the initial investment in 3
years or less?
Advantages
▪ An investment project with a short payback period promises the quick inflow of
cash. It is therefore, a useful capital budgeting method for cash poor firms.
▪ A project with short payback period can improve the liquidity position of the
business quickly. The payback period is important for the firms for which liquidity is
very important.
▪ An investment with short payback period makes the funds available soon to invest in
another project.
▪ A short payback period reduces the risk of loss caused by changing
economic conditions and other unavoidable reasons.
▪ Payback period is very easy to compute.
Disadvantage
◼ The payback method does not take into account the time value of money.
◼ It does not consider the useful life of the assets and inflow of cash after payback period.
◼ For example, If two projects, project A and project B require an initial investment of $5,000.
Project A generates an annual cash inflow of $1,000 for 5 years whereas project B generates
a cash inflow of $1,000 for 7 years. It is clear that the project B is more profitable than project
A. But according to payback method, both the projects are equally desirable because both
have a payback period of 5 years ($5,000/$1,000).
Net Present Value
◼ In simple terms NPV is the sum of discounted cash inflows from a project- the projects
initial outlay
◼ Net present value method (also known as discounted cash flow method) is a popular
capital budgeting technique that takes into account the time value of money. It uses net
present value of the investment project as the base to accept or reject a proposed
investment in projects like purchase of new equipment, purchase of inventory, expansion or
addition of existing plant assets and the installation of new plants etc.
❑ Net present value (NPV):
Net present value is the difference between the present value of cash inflows and the present value of
cash outflows that occur as a result of undertaking an investment project. It may be positive, zero or
negative. These three possibilities of net present value are briefly explained below:
❑ Positive NPV:
If present value of cash inflows is greater than the present value of the cash outflows, the net present
value is said to be positive and the investment proposal is considered to be acceptable.
❑ Zero NPV:
If present value of cash inflow is equal to present value of cash outflow, the net present value is said
to be zero and the investment proposal is considered to be acceptable.
❑ Negative NPV:
If present value of cash inflow is less than present value of cash outflow, the net present value is said
to be negative and the investment proposal is rejected.
◼ The summary of the concept explained so far is given below:
Example
Initial Outlay -30000

Required Rate 12%
Not Discounted Discounted
Year 1 Inflow 10000 $13,392.86
Year 2 Inflow 15000 $11,957.91
Year 3 Inflow 12000 $8,541.36
Year 4 Inflow 10000 $6,355.18
Year 5 Inflow 11000 $6,241.70
Sum 58000 $46,489.00
NPV $16,489.00
Example
 An Agro based company must decide whether to introduce a new product line. The
company will have immediate costs of 100,000 at t = 0. Recall, a cost is a negative for
outgoing cash flow, thus this cash flow is represented as -100,000.
 The company assumes the product will provide equal benefits of 10,000 for each of 12
years beginning at t = 1. For simplicity, assume the company will have no outgoing cash
flows after the initial 100,000 cost. This also makes the simplifying assumption that the net
cash received or paid is lumped into a single transaction occurring on the last day of each
year.
 At the end of the 12 years the product no longer provides any cash flow and is
discontinued without any additional costs. Assume that the effective annual discount
rate is 10%.
 The present value (value at t = 0) can be calculated for each year:
Year Cash flow Present value {NPV} =- 100,000+68,136.92
T =0 100,000/{(1+0.10)^{0} −100,000
{NPV} =-31,863.08
T =1 {10,000}/{(1+0.10)^{1} 9,090.91
T =2 {10,000}/{(1+0.10)^{2} 8,264.46
T =3 {10,000}/{(1+0.10)^{3} 7,513.15 T=7 {10,000/}{(1+0.10)^{7} 5,131.58
T =4 {10,000}/{(1+0.10)^{4} 6,830.13 T=8 {10,000}/{(1+0.10)^{8} 4,665.07
T =5 {10,000}/{(1+0.10)^{5} 6,209.21 T=9 {10,000}/{(1+0.10)^{9} 4,240.98
T =6 {10,000}/{(1+0.10)^{6} 5,644.74 T = 10 {10,000}/{(1+0.10)^{10} 3,855.43
T = 11 {10,000}/{(1+0.10)^{11} 3,504.94
T = 12 {10,000}/{(1+0.10)^{12} 3,186.31
Exercise
Net present value method – uneven cash flow

A project requires an initial investment of $225,000 and is, expected to generate the
following net cash inflows:
Year 1 2 3 4
Cash inflow $95,000 $80,000 $60,000 $55,000
Compute net present value of the project if the minimum desired rate of return is 12%. NPV?
Assumptions: The net present value method is based on two assumptions. These are:
❑ The cash generated by a project is immediately reinvested to generate a return at a rate that is
equal to the discount rate used in present value analysis.
❑ The inflow and outflow of cash other than initial investment occur at the end of each period.
Advantages and Disadvantages:
❑ The basic advantage of net present value method is that it considers the time value of
money.
❑ The disadvantage is that it is more complex than other methods that do not consider present
value of cash flows.
❑ Furthermore, it assumes immediate reinvestment of the cash generated by investment
projects. This assumption may not always be reasonable due to changing economic
conditions.
Perspective
Food
C1 C2 C3 C4 C5
Agro Processing
Producer Centre
Rate of Return (i)
Up/Govt/Private
Whether We should go for this Infra Project?
Internal Rate of Return
◼ Discount rate that equates the present value of inflows with the present value of outflows. In
simple terms it reflects the rate of return for a project
◼ The term internal refers to the fact that its calculation does not incorporate environmental
factors (e.g., the interest rate or inflation).
Initial Outlay -3817
Excel has a very handy
Year 1 Cash Inflow 1000 function that calculates the
Year 2 Cash Inflow 2000 IRR. Make sure you enter the
whole range of
Year 3 Cash Inflow 3000 values including the initial
outlay, which is entered
as a negative value.
IRR 22%
◼ Given a collection of pairs (time, cash flow) involved in a project, the internal rate of
return follows from the net present value as a function of the rate of return. A rate of return
for which this function is zero is an internal rate of return.
◼ Given the (period, cash flow) pairs ( n, Cn) where n is a positive integer, the total
◼ number of periods N, and the {NPV} , (net present value); the IRR is given by r in:
Example: IRR
◼ If an investment may be given by the sequence of cash flows:
Year ( n) Cash flow(Cn)

0 -123400
1 36200
2 54800
3 48100
◼ In this case, the answer is 5.96% (in the calculation, that is, r = .0596).
Minimum acceptable rate of return (MARR)
◼ If the IRR is equal to or greater than the hurdle rate, the project is likely to be
approved, but if not, it is typically rejected.
◼ The hurdle rate is the minimum rate that the company or manager expects to earn
when investing in a project
◼ The IRR, on the other hand, is the interest rate at which the net present value, or NPV, of
all cash flows, both positive and negative, from a project is equal to zero
◼ the hurdle rate is equal to the company's costs of capital, which is a combination of the
cost of equity and the cost of debt
Internal Rate of Return
◼ Concept & Definition – Previously Explained
◼ A corporation will evaluate an investment in a new plant versus an extension of an

existing plant based on the IRR of each project.
◼ In such a case, each new capital project must produce an IRR that is higher than the
company's cost of capital.
◼ Once this hurdle is surpassed, the project with the highest IRR would be the wiser
◼ investment, all other things being equal (including risk)
Issues With IRR
 More than one IRR can be found for projects with alternating positive and negative cash
flows, which leads to confusion and ambiguity
 IRR is sometimes misapplied, under an assumption that interim positive cash flows are
reinvested at the same rate of return as that of the project that generated them. This is
usually an unrealistic scenario and a more likely situation is that the funds will be
reinvested at a rate closer to the firm's cost of capital. The IRR therefore often gives an
unduly optimistic picture of the projects under study. Generally for comparing projects
more fairly, the weighted average cost of capital should be used for reinvesting the
interim cash flows.
Modified Internal Rate of Return [MIRR]
◼ Where n is the number of equal periods at the end

of which the cash flows occur (not the number of
cash flows), PV is present value , FV is future value
YEAR CASH FLOW
◼ Example: 0 -1000
1 -4000
If an investment project is described by the sequence
2 5000
of cash flows:
3 2000
◼ Solution
IRR= IRR (25.48%)
MIRR:
◼ First Step: To calculate the MIRR, we will assume a finance rate of 10% and a reinvestment
rate of 12%. First, we calculate the present value of the negative cash flows (discounted at
the finance rate):
◼ Second Step:
◼ Third Step: The calculated MIRR (17.91%) is lower than IRR (25.48%)
What is Capital Budgeting?
◼ Capital budgeting is the decision making process through which firms decide which projects
get the funding
◼ Financial plans for most projects are based on the capital budgeting analysis using cash flows
◼ Look for Incidental or Synergistic Effects
◼ Working-Capital Requirements
◼ Incremental Expenses
◼ Opportunity Costs
o A benefit that a person could have received, but gave up, to take another course of action
Mutually Exclusive Projects; Independent Projects
◼ Mutually exclusive projects cannot occur simultaneously.
◼ Independent projects have no impact on the viability of other options.
Example:
Assume a company has a budget of $50,000 for expansion projects. If available projects A
and B each cost $40,000 and project C costs only $10,000, then Projects A and B are
mutually exclusive
◼ If the company pursues A, it cannot afford to also pursue B, and vice versa.
Project C, however, is independent;
◼ Regardless of which other project is pursued, the company can still afford to pursue C as well.
The acceptance of either A or B does not impact the viability of C, and the acceptance of C
does not impact the viability of either of the other projects.
Takeaway concepts
❑ Concept of Financial Statements

◆ Balance Sheet Statements
◆ Income Statement
◆ Cash Flow Statements
o Cash Flow from Operational Activities
o Cash Flow from Investment Activities
o Cash Flow from Fianncial Activities
❑ How are these three financial statements inter-related?
◆ Demonstartion: Preparartion of Cash Flow Statements from Balance Sheet and Income
Statement
Takeaway concepts
❑ Capital Budgeting [ Application in Rural Infra Projects]

◆ Payback Period; Numerical Calculation; Advantage and Limitations
◆ NPV; Numerical Calculation; Advantage and Limitations
◆ IRR; Numerical Calculation; Advantage and Limitations
◆ Minimum acceptable rate of return (MARR)
◆ Issues With IRR
◆ Modified Internal Rate of Return
◆ Mutually Exclusive Projects; Independent Projects
◆ Break Even Point; Calculation; Advantage
Perspective
Food
[Rural Infra Project]; Capital Intensive Segment; Profit Centric Segments
C1 C2 C3 C4 C5
Agro Processing Centre
Producer [Rural Infra Project]
Rate of Return (i)
Up/Govt/Private
Break Even Point
Break Even Point
◼ The point at which total cost and total revenue are equal
◼ Total cost= Total Revenue

Fixed Cost+ Variable Cost= Total Revenue
If , P is Unit Sale Price, V is Unit Variable Cost and X is total number of units
◼ Total income= P*X (It may also include total savings)
◼ Fixed cost+ V*X=P*X
◼ X = TFC/ {P-V}
◼ (P-V) = Unit Contribution Margin (C)
◼ C: it is the marginal profit per unit, or alternatively the portion of each sale that contributes to
Fixed Costs.
◼ Thus the break-even point can be more simply computed as the point where Total
Contribution = Total Fixed Cost
◼ By inserting different prices into the formula, you will obtain a number of break-even points,
one for each possible price charged.
Given :X = TFC/ (P-V),
TFC= $ 1000, P= $2, V= $.6,
Then X= 715
◼ If the firm changes the selling price for its product, from $2 to $2.30, in the example above,
then it would have to sell only 1000/(2.3 - 0.6)= 589 units to break even, rather than 715.
Limitations
◼ Only a supply-side (i.e., costs only) analysis
◼ It assumes that fixed costs (FC) are constant (holds for only short run; scale of production is
likely to cause fixed costs to rise)
◼ It assumes average variable costs are constant per unit of output----linearity
◼ It assumes that the quantity of goods produced is equal to the quantity of goods sold –
Where is the inventory variation i.e. inventory at the time of beginning and at the time of
end
◼ In multi-product companies, it assumes that the relative proportions of each product sold
and produced are constant (i.e., the sales mix is constant).
Why Concept of Break Even is Important for Rural Infra Projects?

EXAMPLE 1
◼ Prob: A farmer wants to buy a new combine rather than hire a custom harvester. The total
fixed costs for the desired combine are $21,270 per year. The variable costs (not counting
the operator’s labor) are $8.75 per hour. The farmer can harvest 5 acres per hour. The
custom harvester charges $16.00 per acre. How many acres must be harvested per year to
break-even?
◼ Ans:
◼ Fixed cost+ V*X=P*X
◼ X = TFC/ {P-V}
◼ Fixed costs (F) = $21,270;
◼ Savings (S) = $16/A;
◼ Variable costs (V) = $8.75/ hr / 5 A/hr = $1.75/A;
◼ BE = $21,270 / ($16/A - $1.75/A) = $21,270 /$14.25/A = 1,493 Acres
◼ Break-even analysis can be easily extended to consider other changes.
◼ If the farm operator can save two additional bushels of wheat per acre more
than the custom harvester, what would be the breakeven point if wheat is worth
$4/bushel?
❑ Additional income = $4/bu * 2 bu/A = $8/A;
❑ BE = $21,270 / ($16/A + $8/ A - $1.75/A) = $21,270 / $22.25/A = 956 Acres
◼ A farmer raising 1,200 acres of wheat per year considers purchasing a combine. How
much additional return (to land, capital labor, management and risk) would result?
◼ Additional return = (savings or additional income) - (fixed costs + variable costs);
◼ Additional profit = [[$16/A + ($4/bu * 2 bu/A) ] x 1200 A ] -$21,270 -[ ($8.75/hr / 5
A/hr) x 1200 A] = $28,800-$23,370 = $5,430
◼ Thus, the farmer would generate another $5,430 in additional return by purchasing
the combine.
◼ A farmer harvesting only 900 acres would probably choose not to buy the combine
because the acreage is below the break-even point of 956 acres. The farmer may
want to evaluate the purchase of a smaller or used combine
◼ Additional Situations- Two additional situations are presented as follows:
◼ Problem 1.
❑ If the fixed costs for the combine are $12,000 per year, no additional yield is expected, variable costs
are $7 per hour and the farmer can combine 4 acres per hour, what is the new break-even point?
◼ Problem 2.
❑ If 900 acres are harvested, what is the effect on the farmer’s profits?
◼ Solutions:
◼ Fixed costs = $12,000 Savings = $16/A; Variable costs = $7/hr / 4 A/hr = $1.75/A
◼ Problem 1: BE = $12,000 / ($16/A - $1.75/A) = $12,000 / $14.25/A = 842 Acres
◼ Problem 2: Additional profit = ($16/A x 900 A) - [$12,000 + ($7/hr / 4 A/hr x 900 A) ]= $825 increase
Thank you

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CENTER FOR RURAL DEVELOPMENT AND INNOVATIVE

SUSTAINABLE TECHNOLOGY (CRDIST)

Rural Infrastructure Development and Management

Spring Semester 2023-2024

❑ Concept of Rural Infra Project, Cash Flows Mapping

Capital Intensive Segment; Profit Centric Segments

PV; FV; Annuity; Annuity Due; NPV; Inflation

Source: Don Hofstrand; IOWA STATE UNIVERSITY

◼ Asset - Anything a company owns that

◼ Liability - A firm’s financial obligation.

◼ Equity - An ownership interest in the

◼ The fundamental accounting identity:

Assets = Liabilities + Equity

Current Assets Current Liabilities

Fixed Assets Long Term Liabilities

◼ Income - The difference between a company’s revenues

Net Income = Revenues – Expenses

◼ Cashflow is the movement of money in and out of your

Raw Material Expenses Cash Flow from Operating

Cash Flow from Investing

Loans Cash Flow from Financing

Capital Intensive Segment; Profit Centric Segments

Whether We should go for this Infra Project?

 A criteria used in capital budgeting.

Initial Investment in project 10000

Ca s h inflows after tax

◼ Computation of net annual cash inflow:

Depreciation is a non cash expense and therefore has been ignored.

Year Net cash flow

◼ Compute the payback period for the investment?

Initial Outlay -30000

T =3 {10,000}/{(1+0.10)^{3} 7,513.15 T=7 {10,000/}{(1+0.10)^{7} 5,131.58

T =4 {10,000}/{(1+0.10)^{4} 6,830.13 T=8 {10,000}/{(1+0.10)^{8} 4,665.07

T =5 {10,000}/{(1+0.10)^{5} 6,209.21 T=9 {10,000}/{(1+0.10)^{9} 4,240.98

T =6 {10,000}/{(1+0.10)^{6} 5,644.74 T = 10 {10,000}/{(1+0.10)^{10} 3,855.43

Net present value method – uneven cash flow

Advantages and Disadvantages:

Capital Intensive Segment; Profit Centric Segments

Whether We should go for this Infra Project?

Year ( n) Cash flow(Cn)

◼ Concept & Definition – Previously Explained

◼ A corporation will evaluate an investment in a new plant versus an extension of an

◼ investment, all other things being equal (including risk)

◼ Where n is the number of equal periods at the end

IRR= IRR (25.48%)

◼ Look for Incidental or Synergistic Effects

◼ Mutually exclusive projects cannot occur simultaneously.

◼ Independent projects have no impact on the viability of other options.

❑ Concept of Financial Statements

❑ Capital Budgeting [ Application in Rural Infra Projects]

[Rural Infra Project]; Capital Intensive Segment; Profit Centric Segments

Break Even Point

◼ Total cost= Total Revenue

◼ Only a supply-side (i.e., costs only) analysis

◼ It assumes average variable costs are constant per unit of output----linearity

Why Concept of Break Even is Important for Rural Infra Projects?

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