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BRILLIANT’S Capital Budgeting 425

Illustration 5.1.7
Compute the Net Present Value for a project with net investment of ` 1,00,000 and the
following cash flows if the company’s cost of capital is 10%. Net cash flows for year one is
` 55,000; for the year two is ` 80,000 and for the year three is ` 15,000. [PVF @ 10% for three years
are 0.909, 0.826 and 0.751].
< 1,00,000 Ho$ Hw$b {Zdoe Ho$ gmW EH$ n«moOo³Q> Ho$ {bE ZoQ> àoO|Q> d¡ë¶y VWm {ZåZ{b{IV H¡$e âbmo H$s JUZm
H$s{OE ¶{X H§$nZr H$s H¡${nQ>b H$s bmJV 10% h¡& df© EH$ Ho$ {bE ZoQ> H¡$e âbmo < 55,000, df© Xmo Ho$ {bE
< 80,000 VWm df© VrZ Ho$ {bE < 15,000 h¡& [VrZ df© Ho$ {bE 10% na PVF 0.909, 0.826 VWm 0.751 h¢]&

Solution:
Step I : Initial Investment = ` 1,00,000
Step II : Computation PV of Annual Inflows:

Year Annual inflow PVF @ 10% PV

1 55,000 0.909 49,995
80,000
2 NPP 0.826 66,080
3 15,000 0.751 11,265
Total 1,27,340

Step III: Computation of NPV
NPV = PV of Inflows – PV of Outflows
= 1,27,340 – 1,00,000 = ` 27,340

Illustration 5.1.8
A choice is to be made between two competing projects, which require an equal investments
of ` 50,000 each and are expected to generate net cash flows as under:
Xmo à{V¶moJr àmoOo³Q²>g Ho$ ~rM EH$ MwZmd {H$¶m OmZm h¡ {Og‘| go à˶oH$ ‘| < 50,000 H$m ~am~a {Zdoe H$aZm h¡
VWm ZoQ> H¡$e âbmo CËnÝZ H$aZo H$s Anojm {ZåZ àH$ma h¡… (Amount in `)

Year Project I Project II
1 25,000 10,000
2 15,000 12,000
3 10,000 18,000
4 Nil 25,000
5 12,000 8,000
6 6,000 4,000
The cost of capital is 10%. Using discounted cash flow method, recommend which project is
to be preferred. Use PVF @ 10%.
H¡${nQ>b H$s bmJV 10% h¡& {S>ñH$mC§Q>oS> H¡$e âbmo ‘oWS> H$m Cn¶moJ H$aHo$ gwPmd Xr{OE {H$ {H$g àmoOo³Q> H$mo ng§X
{H$¶m Om¶oJm& 10% PVF H$m Cn¶moJ H$a|&