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Assignment 5

solar energy

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16 views2 pages

Assignment 5

solar energy

Uploaded by

sbsharma5190
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Name – Shri Bhagwan Sharma

Enrol no – 211116036
Section M1
Assignment 5 /Engineering Economics and IPR (HUM 451)
Answer
Vedanta Ltd. is considering investing in a project that requires an initial investment of Rs.
400,000. The estimated cash inflows over 7 years are as follows:

Year Cash Inflow (Rs.)

1 30,000

2 40,000

3 50,000

4 50,000

5 80,000

6 110,000

7 180,000

The project will be evaluated using three methods: the Payback Period, Net Present Value
(NPV), and Internal Rate of Return (IRR). The discount rate for this evaluation is 10%.
(i) Payback Period Method
The Payback Period is the time required to recover the initial investment from the
project’s cash inflows. Below is the cumulative cash inflow for each year:

Year Cash Inflow (Rs.) Cumulative Cash Inflow (Rs.)

1 30,000 30,000

2 40,000 70,000

3 50,000 120,000

4 50,000 170,000

5 80,000 250,000

6 110,000 360,000

7 180,000 540,000
At the end of Year 6, the cumulative cash inflow is Rs. 360,000, which means Rs. 40,000 is
still needed to recover the initial investment. Year 7 provides Rs. 180,000, so the exact
payback period is:
Exact Payback Period=6+40,000/180,000≈6.22 years
Conclusion: The project’s payback period of approximately 6.22 years may be too long,
depending on the company’s investment recovery criteria.
(ii) Net Present Value (NPV) Method
NPV is the sum of the present values of the cash inflows minus the initial investment.
Using a 10% discount rate:
NPV=∑ (Cash Inflow/ (1+0.10) t) − 400,000
NPV≈−63,819
Conclusion: Since the NPV is negative, the project is expected to result in a net loss,
indicating it is not financially viable at a 10% discount rate.
(iii) Internal Rate of Return (IRR) Method
The IRR is the discount rate that makes the NPV equal to zero. After calculating, the IRR for
this project is found to be approximately 6.14%.
Conclusion: The IRR is 6.14%, which is below the required rate of return of 10%. Therefore,
the project is not expected to meet the company’s minimum acceptable rate of return.
Overall Recommendation
Based on the analysis:
 The Payback Period of 6.22 years is relatively long.
 The NPV is negative, indicating a potential loss.
 The IRR is below the required discount rate of 10%.
Final Recommendation: Vedanta Ltd. should not invest in this project as it does not meet
the required financial benchmarks.

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