Session 4 Capital Budgeting Methods NPV IRR
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Session 4 Capital Budgeting Methods NPV IRR
- 15. Profitability Index PI = PV of all Benefits PV of all Cost Example : PV (Benefits) = 26000 + 28000 +.......... + 18000 1.1 (1.1) 2 (1.1) 6 = 125121 PV (Cost) = 100000 PI = 125121 = 1.25 100000
- 22. Modified IRR Reinvestment Rate Assumption (Project A) Project Outlay 25,000 Cash Flows: YR1 2,000 YR2 2,000 YR3 35,000 NPV @ 8%: 6,351 IRR: 17%
- 23. NPV: Project A YR1: 2,000 YR2: 2,000 + 2,000 + 160 = 4,160 YR3: 35,000 + 4,160 + 333 = 39,493 [Note: PV of 39,493, three years from now @ 8% = 31,351 Less: outlay 25,000 NPV 6,351] Modified IRR
- 24. IRR @ 17% YR1: 2,000 = 2,000 YR2: 2,000 + 2,000 + 340 = 4,340 YR3: 35,000 + 4,340 + 738 = 40,078 [25,000 invested for three years @ 17% = 25,000(1.17) 3 = 40,040] Modified IRR
- 25. Modified Internal Rate of Return Find k such that (1+k) n I 0 = Final value i.e. (1+k) 3 25000 = 39,439 k = 16.5% Modified IRR
- 26. Reinvestment Rate Assumption (Project B) Project Outlay 25,000 Cash Flows: YR1 21,000 YR2 10,000 YR3 2,000 NPV @ 8%: 4,606 IRR: 22.12% Modified IRR
- 27. NPV: Project B YR1: 21,000 = 21,000 YR2: 10,000 + 21,000 + 1,680 = 32,680 YR3: 2,000 + 32,680 + 2,614 = 37,294 [Note: PV of 37,294, three years from now @ 8% = 29,606 Less: outlay 25,000 NPV 4,606 ] Modified IRR
- 28. IRR of 22.12% YR1: 21,000 = 21,000 YR2: 10,000 + 21,000 + 4,645 = 35,645 YR3: 2,000 + 35,645 + 7,885 = 45,530 [25,000 invested for three years @ 22.12% = 25,000(1.2212)3 = 45,530] Modified IRR
- 29. Modified Internal Rate of Return Find k such that (1+k) n I 0 = Final value i.e. (1+k) 3 25000 = 37,294 k = 14.26% Modified IRR