Corporate Fin Mgt NDLM.PDF

Equipment B :

Present value of estimated cash outflow is:

18, 00,000 + (12,000 X 0.8333) + (13,000 X 0.6944) + (14,000 X 0.5787)

+ (14,500 X 0.4823) + (15,000 X 0.4019) = Rs.18, 40,150

The present value of estimated cash inflow is:

(8, 00,000 X 0.8333) + (7,00,000 X 0.6944) + (6,00,000 X 0.5787) + (5,00,000 X

0.4823) + (4,00,000 X 0.4019) + (1,00,000 X 0.4019) = Rs.19,42,040

The NPV in the present case is = 1, 01,890

Equipment C :

The PV of estimated cash outflow is:

17, 00,000 + (14,000 X 2.9906) = Rs.17, 41,868

The PV of cash inflow is:

(7, 00,000 X 0.8333) + (7,00,000 x 0.6944) + (6,00,000 X 0.5787) + (6,00,000 X

0.4823) + (3,00,000 X 0.4019) + (50,000 X 0.4019) = Rs.18,46,655

The NPV in the present case = 1, 04,787

Consider the NPV of 3 equipments together.

Equipment A : Rs.2, 63,791

Equipment B : Rs.1, 01,890

Equipment C : Rs.1, 04,787

The decision to purchase should invariably be in favour of Equipment A, even

though its initial cost is higher than that of Equipment B and C.

Internal Rate of Return

2. IRR must be calculated in order to assess at what point of time in the project the
   investor will fully recover his /her initial investment. This point is indicated by
   percentage. If NPV = 0, the Present Value of benefits is equal to the Present Value
   of costs. The time required to recover initial investment may vary from project to
   project. An investor will clearly opt for a project where he/she can quickly recover
   the initial investment, when compared to the other projects.