Page 443 - Corporate Finance PDF Final new link

NPP

BRILLIANT’S Capital Budgeting 443

III PV of Terminal Inflow:
Realization of Salvage Value 1,20,000
Realization of Working Capital 65,000
1,85,000
× PV Factor @ 10% for 4th year × 0.683
1,26,355
IV Computation of NPV:
PV (Inflows) 3,30,472.50
Less: PV (Outflows) 1,26,355
NPV 46,827.50

Since, the NPV is positive, the proposal is acceptable.
Working Note:
1. Calculation of Depreciation
Cost  Salvage Value 3,45,000 1,20,000
Depreciation = = = ` 56,250
Estimated Life 4
Illustration 5.1.14
A company is considering which of two mutually exclusive projects it should undertake. The
Finance Director thinks that the project with the higher NPV should be chosen whereas the
Managing Director thinks that the one with the higher IRR should be undertaken especially as
both projects have the same initial outlay and length of life. The company anticipates a cost of
capital of 10% and after tax the net cash flows of the projects are as follows:
EH$ H§$nZr {dMma H$a ahr h¡ {H$ Xmo nañna g§~§{YV àmoOo³Q²>g ‘| go Bgo {H$gH$mo boZm Mm{hE& ’$m¶Z|g S>m¶ao³Q>a H$m
{dMma h¡ {H$ A{YH$ NPV Ho$ gmW àmoOo³Q> H$m MwZmd {H$¶m OmZm Mm{hE O~{H$ ‘¡ZoqOJ S>m¶ao³Q>a H$m {dMma h¡ {H$ A{YH$
IRR dmbm boZm Mm{hE, {deof ê$n go O~ XmoZm| àmoOo³Q²>g H$m g‘mZ B{Z{e¶b AmCQ>bo VWm OrdZH$mb h¡& H§$nZr H¡${nQ>b
H$s bmJV H$m 10% H$m AZw‘mZ bJmVr h¡ VWm Q>¡³g Ho$ níMmV² àmoOo³Q²>g H$m ZoQ> H¡$e âbmo {ZåZ{b{IV h¡…

Year / df© 0 1 2 3 4 5

(Cash Flows Figs. in, 000)
(H¡$e âbmo AmH§$‹S>o, 000 ‘|)
Project X / àmoOo³Q> X (200) 35 80 90 75 20
Project Y / àmoOo³Q> Y (200) 218 10 10 4 3

Required / Amdí¶H$ h¡:
(a) Calculate the NPV and IRR of each project. / à˶oH$ àmoOo³Q> H$s NPV VWm IRR H$r JUZm&

(b) State, with reasons, which project you would recommend.
H$maU g{hV ~VmB¶o Amn {H$g àmoOo³Q> H$m gwPmd X|Jo&