Page 447 - Corporate Finance PDF Final new link

NPP

BRILLIANT’S Capital Budgeting 447

(ii) Internal Rate of Return: Calculation of NPV of both the project when PVF is 20%.
PVF @ 20%
Year 1 2 3 4 5 6
PVF @ 20% 0.833 0.694 0.579 0.482 0.402 0.335
Cumulative PVF for 6 years = 3.325
Project A Project B
Discounted C.I. @ PVF 20% Discounted C.I. @ PVF 20%
= 80,000 × 3.325 = 1,10,000 × 3.325
= ` 2,66,000 = ` 3,65,750
NPV = 2,66,000 – 3,00,000 NPV = 3,65,750 – 4,20,000
= ` – 34,000 = ` – 54,250

Calculation of IRR
Project A Project B
Using Interpolation Using Interpolation Method

28,960 32,320
IRR = 12 +  20 12  IRR = 12   20 12 
28,960   34,000  32,320   54,250 
28,960 32,320
= 12 +  8 = 12   8
62,960 86,570
= 12 + 3.68 = 12 + 2.99
= 15.68% = 14.99%

On the Basis of IRR method project A would be preferable than project B. Because project A
has IRR greater than project B.

Illustration 5.1.16
Following is the data relating to two projects being considered by a company:
EH$ H§$nZr Ûmam {dMma {H$¶o Om aho Xmo àmoOo³Q²>g go g§~§{YV S>mQ>m {ZåZ{b{IV h¡…

Particulars Project X Project Y
({ddaU) (àmoOo³Q> X) (àmoOo³Q> Y)
(`) (`)
Initial Outlay / B{Z{e¶b AmD$Q>bo 1,80,000 1,60,000

Salvage Value / gm°ëdoO d¡ë¶y 50,000 –
Expected Life / AZw‘m{ZV OrdZ 5 years 5 years