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    Assignment Capital Budgeting: Financial Management

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    Vishal Chandak
    The document analyzes two potential investment projects, Project A and Project B, using internal rate of return calculations. Project A has an internal rate of return of 11.27% compared to 10.24% for Project B. Therefore, based on the internal rate of return method, Project A is the preferable project to select.

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    Assignment Capital Budgeting: Financial Management

    Uploaded by

    Vishal Chandak
    28 views3 pages
    The document analyzes two potential investment projects, Project A and Project B, using internal rate of return calculations. Project A has an internal rate of return of 11.27% compared to 10.24% for Project B. Therefore, based on the internal rate of return method, Project A is the preferable project to select.

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    Capital Budgeting

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    The document analyzes two potential investment projects, Project A and Project B, using internal rate of return calculations. Project A has an internal rate of return of 11.27% compared to 10.24% for Project B. Therefore, based on the internal rate of return method, Project A is the preferable project to select.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    28 views3 pages

    Assignment Capital Budgeting: Financial Management

    Uploaded by

    Vishal Chandak
    The document analyzes two potential investment projects, Project A and Project B, using internal rate of return calculations. Project A has an internal rate of return of 11.27% compared to 10.24% for Project B. Therefore, based on the internal rate of return method, Project A is the preferable project to select.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 3

    Financial Management

    Assignment

    Capital Budgeting
    Ques: A company has to select one of the following two projects:

    Project A Project B
    Cost 22,000 20,0000
    Cash Inflows:
    Year1 12,000 2,000
    Year 2 4,000 2,000
    Year 3 2,000 4,000
    Year 4 10,000 20,000

    Using the Internal Rate of Return methods suggest which Preferable is.

    Solution:

    F = Cash outlay /Cash inflow

    Project A

    Cash Inflow = Total cash inflow / No. of years

    = 28,000 /4 = 7000

    = 22000 /7000 = 3.14

    The factor thus calculated will be located in table II below. This would give the estimated
    rate of return to be applied discounting the cash for the internal rate of returns. In this of
    project A the rate comes to 10% while in case of project B it comes to15%.

    Project A

    Year Cash Inflows(Rs.) Discounting Present Value(Rs.)


    Factor@ 10%
    1 12,000 0.909 10908
    2 4,000 0.826 3304
    3 2,000 0.751 1502
    4 10,000 0.683 6830
    Total 22544
    Less: Initial 20,000
    investment
    Net Present Value 544

    The present value at 10% comes to Rs. 22,544. The initial investment is Rs. 22,000. Interest
    rate of return may be taken approximately at 10%.

    Name: Vishal Chandak


    MBA 2nd Semester
    Financial Management

    In the case more exactness is required another trial which is slightly higher than 10%(since at
    this rate the present value is more than initial investment) may be taken. Taking a rate of 12%
    the following results would emerge.

    Year Cash Inflows(Rs.) Discounting Present Value(Rs.)


    Factor@ 12.6%
    1 12,000 0.893 10,716
    2 4,000 0.794 3,188
    3 2,000 0.712 1,424
    4 10,000 0.636 6360
    Total 21,688
    Less: Initial 22,000
    investment
    Net Present Value (-) 312

    IRR=Base factor + Positive net present value/Difference in positive and Negative net
    present value *DP

     Base factor= 10%

     DP = 2%

    10%+544/544-(-312)*2%

    10%+544/856*2

    10%+1.27

    =11.27%

    Name: Vishal Chandak


    MBA 2nd Semester
    Financial Management

    Project B

    Year Cash Inflows(Rs.) Discounting Present Value(Rs.)


    Factor@ 15%
    1 2,000 0.909# 1,818
    2 2,000 0.826 1,652
    3 4,000 0.751 3,004
    4 20,000 0.683 13,660
    Total 20,134
    Less: Initial 20,000
    investment
    Net Present Value 134

    IRR= 10%+134/134-(2676)*5*

    =10%+0.24 IRR = 10.24%

    Thus, internal rate of return in project ‘A’ is higher as compared to project ‘B’. Therefore
    project ‘A’ is preferable.

    Name: Vishal Chandak


    MBA 2nd Semester

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