Page 480 - Corporate Finance PDF Final new link

NPP

480 Corporate Finance BRILLIANT’S

Solution:

Years Cashflow CE CFAT × CE PVF@12% PV
(`) (`) (`) (`) (`)
0 (2,00,000) 1 (2,00,000) 1.00 (2,00,000)
1 1,60,000 0.80 1,28,000 0.893 1,14,304
2 1,40,000 0.70 98,000 0.797 78,106
3 1,30,000 0.60 78,000 0.712 55,536
4 1,20,000 0.40 48,000 0.636 30,528
5 80,000 0.30 24,000 0.567 13,608

NPV 92,082

Illustration 5.2.5
A company is considering two mutually exclusive projects. The company uses a certainty
equivalent approach. The estimated cashflows and certainty equivalent for each of the projects
are as follows:
EH$ H§$nZr nmañn{aH$ ê$n go g§~§{YV Xmo àmoOo³Q²>g na {dMma H$a ahr h¡& H§$nZr EH$ gQ>}ÝQ>r Bp³ddoboÝQ> EàmoM H$m
Cn¶moJ H$aVr h¡& à˶oH$ àmoOo³Q> Ho$ {bE EpñQ>‘oQ>oS> H¡$eâbmo VWm gQ>}ÝQ>r Bp³ddoboÝQ> {ZåZ{b{IV h¢…

Project / àmoOo³Q> - 1 Project / àmoOo³Q> - 2
Year Cash flows CE Cash flows CE

(df©) (H¡$e âbmo) (H¡$e âbmo)
(`) (`)
0 (30,000) 1 (40,000) 1.00
1 15,000 0.95 25,000 0.90
2 18,000 0.85 20,000 0.80
3 20,000 0.70 25,000 0.70
4 20,000 0.65 18,000 0.60

Which project should be accepted, if the required rate of return of firm is 10%?
{H$g àmoOo³Q> H$mo ñdrH$ma {H$¶m OmZm Mm{hE, ¶{X ’$‘© Ho$ [aQ>Z© H$s Amdí¶H$ aoQ> 10% h¡?
Solution:
Computation of NPV: Project 1.

Year Cashflow CE CF×CE PVF@10% PV
(`) (`) (`) (`) (`)
0 (30,000) 1 (30,000) 1.00 (30,000)
1 15,000 0.95 14,250 0.909 12,953