Solution (a)

Using a constant discount factor throughout life:

Year DF used Cash Flow DF @ 14% Present Value
1 14% 100,000 0.8772 87,719
2 14% 200,000 0.7695 153,894
3 14% 300,000 0.6750 202,491
4 14% 600,000 0.5921 355,248
5 14% 300,000 0.5194 155,811
Total Present Value 955,163
Less: Initial Cash Outlay 1,000,000
Net Present Value -44,837

Solution (b)
Using variable discount factors
Year DF used Cash Flow Discount Factor Present Value
1 12% 100,000 0.8929 89,286
2 13% 200,000 0.7901 158,028
3 14% 300,000 0.6931 207,931
4 15% 600,000 0.6027 361,620
5 16% 300,000 0.5196 155,871
Total Present Value 972,735
Less: Initial Cash Outlay 1,000,000
Net Present Value -27,265
 Workings:

Comp
Year
1
2
3
4
5

(i) Pay Back Period

Year Cash Inflow Cumulative C.I. PBP = 2 yrs + {(5,00,000 - 3.47,000) / 1,98,000}
1 170,000 170,000
2 177,000 347,000 PBP = 2 + (1,53,000 / 1,98,000)
3 198,000 545,000
4 205,000 750,000 PBP = 2 + 0.7727 = 2.7727 years
5 275,000 1,025,000

(ii) Average Rate of Return (v) Internal Rate of Return

Average Investment = (5,00,000 + 0) / 2 = 2,50,000 Year

1
Average Return = Total PAT / 5 2
AR = (70,000 + 77,000 + 98,000 + 1,05,000 + 1,75,000) / 5 = 5,25,000 / 5 = 1,05,000 3
4
Average Rate of Return = Average Return / Average Investment x 100 5
Total Present Value
ARR = 1,05,000 / 2,50,000 x 100 = 42% Less: Investment
Net Present Value
Average Rate of Return is 42%.
Internal Rate of Return (IRR)
(iii) Net Present Value at 10% DF
IRR = LDF + { (HDF - LDF) x (N
Year Cash Inflow Dis. Fac. @ 10% Present Value
1 170,000 0.9091 154,545 LDF = Lower Discount Factor
 2 177,000 0.8264 146,281 HDF = Higher Discount Facto
3 198,000 0.7513 148,760 NPV at LDF = Net Present Va
4 205,000 0.6830 140,018 Difference in TPV = (Total Pr
5 275,000 0.6209 170,753 Diff in TPV = 7,60,358 - 6,65,
Total Present Value 760,358
Less: Investment 500,000 IRR = 10 + { (15 - 10) x (2,60,
Net Present Value 260,358
IRR = 10 + ( 5 x 2.752979) =
(iv) Profitability Index at 10% CoC
Hence, the Internal Rate of
Profitability Index = Total PV of Cash Inflows / Total PV of Cash Outflows

PI = 7,60,358 / 5,00,000 = 1.5207

Hence, the Profitability Index is 1.5207

 Computation of "PAT" and "C.I."
PBT Tax @ 30% PAT Depn Cash Inflow
100,000 30,000 70,000 100,000 170,000
110,000 33,000 77,000 100,000 177,000
140,000 42,000 98,000 100,000 198,000
150,000 45,000 105,000 100,000 205,000
250,000 75,000 175,000 100,000 275,000

(v) Internal Rate of Return

Cash Inflow DF @ 10% Present Value DF @ 15% Present Value

170,000 0.9091 154,545 0.8696 147,826
177,000 0.8264 146,281 0.7561 133,837
198,000 0.7513 148,760 0.6575 130,188
205,000 0.6830 140,018 0.5718 117,209
275,000 0.6209 170,753 0.4972 136,724
Total Present Value 760,358 665,785
Less: Investment 500,000 500,000
Net Present Value 260,358 165,785

Internal Rate of Return (IRR) is computed by using the following formula:

IRR = LDF + { (HDF - LDF) x (NPV at LDF / Difference in TPV of LDF and HDF) }

LDF = Lower Discount Factor = 10

HDF = Higher Discount Factor = 15
NPV at LDF = Net Present Value at Lower Discount Factor = 2,60,358
Difference in TPV = (Total Present Value at LDF - Total Present Value at HDF)
Diff in TPV = 7,60,358 - 6,65,785 = 94,573

IRR = 10 + { (15 - 10) x (2,60,358 / 94,573)}

IRR = 10 + ( 5 x 2.752979) = 10 + 13.76489 = 23.76489%

Hence, the Internal Rate of Return of the Project is 23.76%.

 Calculation of Pay Back Perio

Project X
Year
1
2
3
4

PBP of X = 2 yrs + { (20,00,00

= 2 yrs + (6,40,000 / 6,80,000

Note: 20 million means 2,000,000 = 20,00,000 (20 lakhs) Project Y

Year
Workings: 1
Computation of "Cash Inflows" 2
PROJECT X 3
Year PBDT Depn PBT Tax** PAT Cash Inflow 4
1 800,000 500,000 300,000 120,000 180,000 680,000
2 800,000 500,000 300,000 120,000 180,000 680,000 PBP of Y = 2 yrs + { (20,00,000
3 800,000 500,000 300,000 120,000 180,000 680,000
4 800,000 500,000 300,000 120,000 180,000 680,000 = 2 yrs + (1,00,000 / 5,60,000

PROJECT Y Decision:
Year PBDT Depn PBT Tax** PAT Cash Inflow Project Y is to be accepted sin
1 1,500,000 500,000 1,000,000 400,000 600,000 1,100,000
2 1,000,000 500,000 500,000 200,000 300,000 800,000
3 600,000 500,000 100,000 40,000 60,000 560,000
4 200,000 500,000 -300,000 - -300,000 200,000

** Since Tax Rate is not given in the problem, it is assumed at 40% rate.
Calculation of Pay Back Period Calculation of Net Present Value

Project X
Cash Inflow Cumulative C.I. Year Cash Inflow DF @ 12%
680,000 680,000 1 680,000 0.8929
680,000 1,360,000 2 680,000 0.7972
680,000 2,040,000 3 680,000 0.7118
680,000 2,720,000 4 680,000 0.6355
Total Present Value
PBP of X = 2 yrs + { (20,00,000 - 13,60,000) / 6,80,000 } Less: Investment
Net Present Value
= 2 yrs + (6,40,000 / 6,80,000) = 2 + 0.9412 = 2.9412 years

Project Y
Year Cash Inflow DF @ 12%
Cash Inflow Cumulative C.I. 1 1,100,000 0.8929
1,100,000 1,100,000 2 800,000 0.7972
800,000 1,900,000 3 560,000 0.7118
560,000 2,460,000 4 200,000 0.6355
200,000 2,660,000 Total Present Value
Less: Investment
PBP of Y = 2 yrs + { (20,00,000 - 19,00,000) / 5,60,000 } Net Present Value

= 2 yrs + (1,00,000 / 5,60,000) = 2 + 0.1786 = 2.1786 years Decision:

The NPV of Project Y (₹1,45,599) is greater than
that of Project X (₹65,398). Hence, Project Y may
Project Y is to be accepted since it has LOWER PBP of the two. be accepted among the two.

Calculation of Profitability Index

PI = Total PV of Cash Inflows / Total PV of Cash Outflows

PI of Project X = 20,65,398 / 20,00,000 = 1.0327

PI of Project Y = 21,45,599 / 20,00,000 = 1.0728

Decision:
Since the Profitability Index of Project Y (1.0728)
is greater than that of Project X (1.0327), it is
profiable to accept Project Y.
 Present Value
607,143
542,092
484,011
432,152
2,065,398
2,000,000
65,398

Present Value
982,143
637,755
398,597
127,104
2,145,599
2,000,000
145,599

1,45,599) is greater than

98). Hence, Project Y may
two.

flows / Total PV of Cash Outflows

98 / 20,00,000 = 1.0327

99 / 20,00,000 = 1.0728

dex of Project Y (1.0728)

roject X (1.0327), it is
ect Y.