Page 450 - Corporate Finance PDF Final new link

NPP

450 Corporate Finance BRILLIANT’S

4 0.683 58,000 39,614 41,000 28,003
5 0.621 38,000 23,598 46,000 28,566
1,82,955 1,68,583
Step-III : PV of Terminal Inflow:
Salvage value realized (Project X) 50,000
× PV factor for 5 year × 0.621
th
= 31,050
Step-IV : Computation of NPV:
X Y

NPV = (1,82,955+31,050) –1,80,000  (1,68,583 –1,60,000) 
= ` 34,005 = ` 8,583
Comment: Company should prefer X, due to its higher NPV.
(iii)IRR Method:
Computation of Net Cash Flow (Project X) (Amount in `)

Year Cash Flows PV Factor PV PV Factor PV
@ 16% @ 17%

0 (–) 1,80,000 1.000 (1,80,000) 1.000 ( 1,80,000)
1 53,000 0.862 45,686 0.855 45,315
2 43,000 0.743 31,949 0.731 31,433
3 48,000 0.641 30,768 0.624 29,952
4 58,000 0.552 32,016 0.534 30,972
5 (38,000 + 50,000) 0.476 41,888 0.456 40,128
Total 2,307 (–) 2,200

2,307
Interpolation: = 16 +  (17 16) = 16.512%
(2,307+ 2,200)
Computation of Net Cash Flow (Project Y) (Amount in `)
Year Cash Flows PV Factor PV PV Factor PV
@ 11% @ 12%
0 (1,60,000) 1.000 (1,60,000) 1.000 (1,60,000)
1 58,500 0.9 52,650 0.893 52,240.50
2 38,500 0.812 31,262 0.797 30,684.50
3 36,000 0.731 26,316 0.712 25,632.00
4 41,000 0.659 27,019 0.636 26,076
5 46,000 0.593 27,278 0.567 26,082.00
4,525 715