Paper Topic:

week 4 inv

Calculation of projects pay back period

For Project A

The company recovers initial cash outflow of 100 ,000 , between year 3 and year 4

After year 3 4000 is still not yet recovered . Year 4 cash inflow is 32 ,000 hence 4000 /32000 1 /8th of year 4 cash flow brought the cumulative cash flow to zero . So , payback period is 3 years plus 1 /8 year 3 .125 years

For Project B

The company recovers initial cash outflow of 100 ,000 , between year 4 and year 5

Year

5 cash inflow is 200 ,000 hence 100 ,000 /200 ,000 1 /2 of year 5 cash flow would result in the cumulative cash flow to zero . So , payback period is 4 years plus 1 /2 year 4 .5 years

Calculation of Net Present Value

NPV CF0 CF1 CF2 CF3 CFn (1 r (1 r )^2 (1 r )^3 (1 r )^n

For Project A , NPV -100 ,000 32000 32000 32000 32000 32000 (1 .11 (1 .11 )^2 (1 .11 )^3 (1 .11 )^4 (1 .11 )^5 18 ,268 .70

For Project B , NPV -100 ,000 200 ,000 (1 .11 )^5 18 ,690 .26

Calculation of Internal Rate of Return

For the purpose of IRR

NPV of inflows NPV of outflows

CF0 CF1 CF2 CF3 CFn (1 r (1 r )^2 (1 r )^3 (1 r )^n

For project A

100 ,000 32000 32000 32000 32000 32000 (1 .r (1 .r )^2 (1 .r )^3 (1 .r )^4 (1 .r )^5...

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