Learning Curve…

MB0045 : Given the following projects , rank them on the basis of NPV, MIRR and Payback period if the cost of capital is 10% pa.

Posted on: September 21, 2011

MB0045  : Given the following projects , rank them on the basis of NPV, MIRR and Payback period if the cost of capital is 10% pa.
 

Project A                          Project B                                Project C

Year          Cash flow                   Year    Cash flow                   Year    Cash flow

0                -10000                        0          -10000                        0          -10000

1                5000                            1          5000                            1          5000

2                7000                            2          8000                            2          8500

3                8000                            3          6500                            3          9000

4                15000                          4          11000                          4          12000

 

Solution:

Computation of NPV

Project A

Year

Cash in flows

PV factor at 10%

PV of Cash in flows

1

5000

0.909

4545

2

7000

1.736

12152

3

8000

2.487

19896

4

15000

3.17

47550

PV of Cash inflow

84143

Initial cash outlay

10000

NPV

74143

 

 

Project B

Year

Cash in flows

PV factor at 10%

PV of Cash in flows

1

5000

0.909

4545

2

8000

1.736

13888

3

6500

2.487

16165.5

4

11000

3.17

34870

PV of Cash inflow

69468.5

Initial cash outlay

10000

NPV

59468.5

 

 

Project C

Year

Cash in flows

PV factor at 10%

PV of Cash in flows

1

5000

0.909

4545

2

8500

1.736

14756

3

9000

2.487

22383

4

12000

3.17

38040

PV of Cash inflow

79724

Initial cash outlay

10000

NPV

69724

Computation of Payback Period

Year

Project A

Project B

Project C

Cash Flow

Cumulative Cash Flows

Cash Flow

Cumulative Cash Flows

Cash Flow

Cumulative Cash Flows

1

5000

5000

5000

5000

5000

5000

2

7000

12000

8000

13000

8500

13500

3

8000

20000

6500

19500

9000

22500

4

15000

35000

11000

30500

12000

34500

From the cumulative cash flow the initial cash outlay of Rs. 10000 lies between 1st year and 2nd year in respect of project A, project B and project C.

Therefore, payback period for project A is

1+ 10000 – 5000  = 1.4years

12152

Therefore, payback period for project B is

1+ 10000 – 5000  = 1.36years

13188

Therefore, payback period for project C is

1+ 10000 – 5000  = 1.3years

14756

Ranking of Projects

Project

NPV

Payback Period

Absolute

Rank

Absolute

Rank

A

74143.00

2

1.4

1

B

59468.50

3

1.36

2

C

79724.00

1

1.3

3

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1 Response to "MB0045 : Given the following projects , rank them on the basis of NPV, MIRR and Payback period if the cost of capital is 10% pa."

The solution is incorrect.

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