Cost of capital 0.
1
NPV `=PV of cash inflows - PV of cash outflows
Project A
Alternative 1: Logical approach
PV of a rupee PV of cash
Years Cash flows at 10% flows @ 10%
0 -1000
1 1000
2 0
3 0
4 0
5 0
NPV
PV of cash inflows (in Rs)
PV of cash outflows (in Rs)
NPV
Alternative 2: Using Excel Approach:
NPV
Project B:
Alternative 1: Logical approach
PV of a rupee PV of cash
Years Cash flows at 10% flows @ 10%
0 -2000
1 1000
2 1000
3 4000
4 1000
5 1000
PV of cash
inflows
PV of cash
outflows
NPV
Alternative 2: Using Excel Approach
NPV
Project C:
Alternative 1: Logical approach
PV of a rupee PV of cash
Years Cash flows at 10% flows @ 10%
0 -3000
1 1000
2 1000
3 0
4 1000
5 1000
PV of cash
inflows
PV of cash
outflows
NPV
Alternative 2: Using Excel Approach:
NPV
Cost of
capital 0.1
Project A
Years Cash flows
0 -1000
1 1000
2 0
3 0
4 0
5 0
Payback period = 1 year
Project B
Years Cash flows
0 -2000
1 1000
2 1000
3 4000
4 1000
5 1000
Payback period = 2 years
Project C
Years Cash flows
0 -3000
1 1000
2 1000
3 0
4 1000
5 1000
Payback period = 4 years
Conclusion: If cutoff period is three years, then projects A and B should be accepted.
cost of capital 0.1
Project A
Discount rate PV of cash
Years Cash flows @ 10% flows @ 10%
0 -1000 1 -1000
1 1000 0.909 909.091
2 0 0.826 0.000
3 0 0.751 0.000
4 0 0.683 0.000
5 0 0.621 0.000
Conclulsion:
The present value of the cash inflows for Project A never recovers the initial outlay for the
Project B
Cumulative
Discount rate PV of cash cash inflows
Years Cash flows @ 10% flows @ 10% @ 10%
0 -2000 1 -2000.000
1 1000 0.909 909.091 909.091
2 1000 0.826 826.446 1735.537
3 4000 0.751 3005.259 4740.796
4 1000 0.683 683.013 5423.810
5 1000 0.621 620.921 6044.731
Conclusion: The initial investment of the project is Rs 2000. The project requires 2 years to recover Rs 1735.54, and
present value of cash flows of Rs 3005.26
Conclusion: 2 years + (2000 - 1735.53)/3005.26
= 2 years + 264.47/3005.26
= 2.09 years
Project C
Cumulative
Discount rate PV of cash cash inflows
Years Cash flows @ 10% flows @ 10% @ 10%
0 -3000 1 -3000.000
1 1000 0.909 909.091 909.091
2 1000 0.826 826.446 1735.537
3 0 0.751 0.000 1735.537
4 1000 0.683 683.013 2418.551
5 1000 0.621 620.921 3039.472
Conclusion: 4 years + (3000 - 2418.55)/620.92
= 4 years + 581.45/620.92
= 4.94 years
(e)Using the discounted payback period rule with a cutoff of three years, the firm would accept only Project B.
the initial outlay for the project, which is always the case for a negative NPV project.
cover Rs 1735.54, and the remaining Rs 264.47 has to be recovered out of third years'
t only Project B.
