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Project Analysis Solution 1

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19 views5 pages

Project Analysis Solution 1

Uploaded by

bishalsandhya003
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Solution:

Cumulative
Year CF X CF Y CF
0 -50 -50 X Y
1 10 25 10 25
2 15 17 25 42
3 18 15 43 57
4 24 10 67 67

𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡−𝐶𝑢𝑚 𝐶𝐹 𝑜𝑓 𝐿𝑜𝑤 𝑦𝑒𝑎𝑟


a. PBPX = Low year +
𝐶𝐹 𝑜𝑓 𝐿𝑜𝑤 𝑦𝑒𝑎𝑟
50−43
=3+ = 3.29 Year
24

𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡−𝐶𝑢𝑚 𝐶𝐹 𝑜𝑓 𝐿𝑜𝑤 𝑦𝑒𝑎𝑟


PBPY = Low year +
𝐶𝐹 𝑜𝑓 𝐿𝑜𝑤 𝑦𝑒𝑎𝑟
50−42
=2+ = 2.33 Year
24
b. Discounted PBP=?
Year CF X CF Y PVIF@12 Present Value Cumulative PV of CF
0 -50 -50 1 X Y X Y
1 10 25 0.892857 8.93 22.32 8.93 22.32
2 15 17 0.797194 11.96 13.55 20.89 35.87
3 18 15 0.71178 12.81 10.68 33.70 46.55
4 24 10 0.635518 15.25 6.36 48.95 52.91

𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡−𝐶𝑢𝑚 𝑃𝑉 𝐶𝐹 𝑜𝑓 𝐿𝑜𝑤 𝑦𝑒𝑎𝑟


DPBPX = Low year +
𝑃𝑉 𝑜𝑓 𝐶𝐹 𝑜𝑓 𝐿𝑜𝑤 𝑦𝑒𝑎𝑟

The DPBP of X is more than 4 year


𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡−𝐶𝑢𝑚 𝑃𝑉 𝐶𝐹 𝑜𝑓 𝐿𝑜𝑤 𝑦𝑒𝑎𝑟
DPBPY = Low year +
𝑃𝑉 𝑜𝑓 𝐶𝐹 𝑜𝑓 𝐿𝑜𝑤 𝑦𝑒𝑎𝑟
50−46.55
3+ = 3.32 Years
10.68

c. NPV =?

Year CF X CF Y PVIF@12 X Y
0 -50 -50 1.0000 -50 -50
1 10 25 0.8929 8.93 22.32
2 15 17 0.7972 11.96 13.55
3 18 15 0.7118 12.81 10.68
4 24 10 0.6355 15.25 6.36
NPV -1.05 2.91
NPV of Y is positive but NPV of X is negative so Y should be chosen.
d. If cost of capital is 10 percent

Year CF X CF Y PVIF@10 X Y
0 -50 -50 1.0000 -50 -50
1 10 25 0.9091 9.09 22.73
2 15 17 0.8264 12.40 14.05
3 18 15 0.7513 13.52 11.27
4 24 10 0.6830 16.39 6.83
NPV 1.40 4.88
NPVY>NPVX so Y should be chosen.
e. IRR of X lies between 10 % and 12%
NPV at 10% = 1.4 , NPV at 12% = -1.05

𝑁𝑃𝑉 𝑎𝑡 𝐿𝑅
IRR = Low rate + ( HR – LR)
𝑁𝑃𝑉 𝑎𝑡 𝐿𝑅−𝑁𝑃𝑉 𝑎𝑡 𝐻𝑅

1.4
IRR = 10 + ( 12 –10) = 11.13%
1.4+1.05
Like wise IRR of Y = 15.2%

f. If cost of capital is 14%

Year CF X CF Y FV X FV Y
1 10 25 14.82 37.04
2 15 17 19.49 22.09
3 18 15 20.52 17.10
4 24 10 24.00 10.00
Future value 78.83 86.23

𝑇𝑜𝑡𝑎𝑙 𝐹𝑉 𝑜𝑓 𝐶𝐹 1/𝑛
MIRR = ( ) –1
𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡

78.83 1/4
MIRRX = ( ) – 1 = 10.96%
50

86.23 1/4
MIRRY = ( ) – 1 = 14.6%
50

Problem: The sales of a certain product during a five year period have been as
follows:

Year (X) Sales (Y)


1 2000
2 2200
3 2100
4 2600
5 2800
6 2700
7 3000
8 3200
a. Find the least square regression line for the data given. Forecast the sales
for next five years.
b. Using the moving average method, forecast 4 to 8 year considering 3
year moving average.
c. Explain the qualitative methods of demand forecasting.
Solution:
a. Least square regression to forecast the sales:

Year (X) Sales (Y) XY X2


1 2000 2000 1
2 2200 4400 4
3 2100 6300 9
4 2600 10400 16
5 2800 14000 25
6 2700 16200 36
7 3000 21000 49
8 3200 25600 64
Total 36 20600 99900 204
The least square regression equation or the equation of time series analysis is:

Y = a + bX

(where, a = Intercept and b = slope of equation)

Y = dependent variable or sales in units, X = Time in year

∑Y = na +b∑X

∑XY = a∑X +b∑X2

20600= 8a + 36b………………..(1)

99900 = 36a + 204b…………..(2)

Multiply by 9 in equation (1) and multiply by 2 in equation (2), then subtract (2)
from (1)

185400 = 72a + 324b

199800 = 72a+408b

Then, - 14400 = -84 b


14400
b= = 171.4286
84
∑XY−n(Average X)(Average Y) 99900−8×4.5×2575
Or b = = = 171.4286
∑𝑋 2 −𝑛(𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑋)2 204−8(4.5)(4.5)

Put the value of ‘b’ in equation (1), then 20600= 8a + 36(171.4286)

20600−36×171.4286
a= = 1803.5714
8

Then, Least square equation is: Sales (Y) = a + b (time in year or X)

Forecasted sales for next 5 years:

Year Estimated value


9 3346.43
10 3517.86
11 3689.29
12 3860.71
13 4032.14
b. Calculation of moving average

Year (X) Sales (Y) 3year moving average


1 2000
2 2200
3 2100
2000 + 2200 + 2100 2100
4 2600 3
2200 + 2100 + 2600 2300
5 2800 3
2100 + 2600 + 2800 2500
6 2700 3
2600 + 2800 + 2700 2700
7 3000 3
2800 + 2700 + 3000 2833.33
8 3200 3

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