Company ABC is considering an investment in a new project. The company has an option of two projects A & B. The project A will require an initial outlay of Rs.100,000 and project B will require Rs.120,000. The discount rate for both projects is 12% and both projects are expected to generate following cash flows at the end of years:
Year Project A Project B
Rs. Rs.
1 50,000 60,000
2 40,000 40,000
3 50,000 50,000
Calculate net present value of both projects and suggest which project is more feasible. Show complete calculation with formulas.
Year Project A Project B
Rs. Rs.
1 50,000 60,000
2 40,000 40,000
3 50,000 50,000
Calculate net present value of both projects and suggest which project is more feasible. Show complete calculation with formulas.
Idea Solution:-
PROJECT (A)
PROJECT A INITIAL INVESTMENT IS 100000
R = 12%
R =12/100 =.12
FORMULAS
PV =FV/ (1+R)^T
NPV =EXPECTED CASH FLOW - COST
NOW FIRST WE FIND PV
FORMULA FOR PV IN T PERIOD IS
PV =FV/(1+R)^T
PV =50000/(1+.12)+40000/(1+.12)^2 + 50000/(1+.12)^3
PV =50000/1.12 +40000/1.12)^2 + 50000/(1.12)^3
PV =50000/1.12 + 40000/1.25 + 50000/1.40
PV =44642.8571 +31887.7551 +35589.0124
PV =112119.6246 EXPECTED CASH FLOW
NOW NPV IS
NPV = EXPECTED CASH FLOW- COST
NPV =112119.6246 – 100000
NPV =12119.6246
PROJECT (B)
PROJECT B INITIAL INVESTMENT IS 120000
R = 12%
R =12/100 =.12
FORMULA
PV =FV/(1+R)^T
NOW FIRST WE FIND PV
FORMULA FOR PV IN T PERIOD IS
PV =FV/ (1+R)^T
PV =60000/(1+.12) + 40000/(1+.12)^2 + 50000/(1+.12)^3
PV =60000/1.12 + 40000/1.25 + 50000/1.40
PV =53571.4286 + 31887.7551 +35589.0124
PV =121048.1961 EXPECTED CASH FLOW
NOW NPV IS
NPV = EXPECTED CASH FLOW- COST
NPV =121048.1961 – 120000
NPV =1048.1961
PROJECT A IS MORE FEASIBLE THAN THE PROJECT B
PROJECT A INITIAL INVESTMENT IS 100000
R = 12%
R =12/100 =.12
FORMULAS
PV =FV/ (1+R)^T
NPV =EXPECTED CASH FLOW - COST
NOW FIRST WE FIND PV
FORMULA FOR PV IN T PERIOD IS
PV =FV/(1+R)^T
PV =50000/(1+.12)+40000/(1+.12)^2 + 50000/(1+.12)^3
PV =50000/1.12 +40000/1.12)^2 + 50000/(1.12)^3
PV =50000/1.12 + 40000/1.25 + 50000/1.40
PV =44642.8571 +31887.7551 +35589.0124
PV =112119.6246 EXPECTED CASH FLOW
NOW NPV IS
NPV = EXPECTED CASH FLOW- COST
NPV =112119.6246 – 100000
NPV =12119.6246
PROJECT (B)
PROJECT B INITIAL INVESTMENT IS 120000
R = 12%
R =12/100 =.12
FORMULA
PV =FV/(1+R)^T
NOW FIRST WE FIND PV
FORMULA FOR PV IN T PERIOD IS
PV =FV/ (1+R)^T
PV =60000/(1+.12) + 40000/(1+.12)^2 + 50000/(1+.12)^3
PV =60000/1.12 + 40000/1.25 + 50000/1.40
PV =53571.4286 + 31887.7551 +35589.0124
PV =121048.1961 EXPECTED CASH FLOW
NOW NPV IS
NPV = EXPECTED CASH FLOW- COST
NPV =121048.1961 – 120000
NPV =1048.1961
PROJECT A IS MORE FEASIBLE THAN THE PROJECT B
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