Scribd
Upload
3 views7 pages

Problems

The document evaluates two mutually exclusive projects, A and B, requiring an initial investment of ₹60,000 each, detailing their cash inflows over five years. It calculates the payback period, net profit, ROI, and NPV for both projects, concluding that Project A has a payback period of 4 years and a negative NPV, while Project B has a payback period of 3.33 years and a positive NPV. Additionally, it analyzes an uneven cash flow project with an initial investment of ₹50,000, resulting in a breakeven ROI and a negative NPV.

Uploaded by

sangeethak.rvitm
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
3 views7 pages

Problems

The document evaluates two mutually exclusive projects, A and B, requiring an initial investment of ₹60,000 each, detailing their cash inflows over five years. It calculates the payback period, net profit, ROI, and NPV for both projects, concluding that Project A has a payback period of 4 years and a negative NPV, while Project B has a payback period of 3.33 years and a positive NPV. Additionally, it analyzes an uneven cash flow project with an initial investment of ₹50,000, resulting in a breakeven ROI and a negative NPV.

Uploaded by

sangeethak.rvitm
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
You are on page 1/ 7

1.

Investment Analysis: Payback Period and NPV Methods

Problem Statement

A company is evaluating two mutually exclusive projects — Project A and Project


B. Each requires an initial investment of ₹60,000. The expected cash inflows over
the next 5 years are as follows:

Year Project A (₹) Project B (₹)

1 15000 10000

2 15000 20000

3 15000 25000

4 15000 15000

5 15000 10000

1. Calculate Payback period


2. Net profit
3. ROI
4. NPV

Solution

Given:

 Initial Investment: ₹60,000 (for both projects)


 Cash inflows over 5 years:

Project A Project B
Year
(₹) (₹)
1 15,000 10,000
2 15,000 20,000
3 15,000 25,000
4 15,000 15,000
5 15,000 10,000

 Assume Discount Rate (for NPV): 10% (unless stated otherwise)


1. ✅ Payback Period

Payback period = Time taken to recover the initial investment from cash inflows.

▶ Project A:

Cumulative inflows:

 Year 1: ₹15,000
 Year 2: ₹30,000
 Year 3: ₹45,000
 Year 4: ₹60,000 → Recovered in Year 4

✅ Payback Period = 4 years

▶ Project B:

Cumulative inflows:

 Year 1: ₹10,000
 Year 2: ₹30,000
 Year 3: ₹55,000
 Year 4: ₹70,000 → Recovered during Year 4

To find the exact time:

 Remaining = ₹5,000 after Year 3


 Year 4 inflow = ₹15,000
 Fraction of year = ₹5,000 / ₹15,000 = 1/3

✅ Payback Period = 3 + 1/3 = 3.33 years

2. ✅ Net Profit

Net Profit = Total Cash Inflows – Initial Investment


▶ Project A:

 Total Inflows = ₹15,000 × 5 = ₹75,000


 Net Profit = ₹75,000 – ₹60,000 = ₹15,000

▶ Project B:

 Total Inflows = ₹10k + ₹20k + ₹25k + ₹15k + ₹10k = ₹80,000


 Net Profit = ₹80,000 – ₹60,000 = ₹20,000

3. ✅ ROI (Return on Investment)

ROI = (Net Profit / Initial Investment) × 100

▶ Project A:

ROI = (15,000 / 60,000) × 100 = 25%

▶ Project B:

ROI = (20,000 / 60,000) × 100 = 33.33%

4. ✅ NPV (Net Present Value at 10%)

We discount each year’s cash inflow using PV factor = 1 / (1 + r)^n, where r =


10%.

Year PV Factor @10% Project A PV A Project B PV B


1 0.909 15,000 13,635 10,000 9,090
2 0.826 15,000 12,390 20,000 16,520
3 0.751 15,000 11,265 25,000 18,775
4 0.683 15,000 10,245 15,000 10,245
5 0.621 15,000 9,315 10,000 6,210
56,850 60,840

▶ Final NPV:
 Project A NPV = 56,850 – 60,000 = –₹3,150
 Project B NPV = 60,840 – 60,000 = ₹840

2. ROI and NPV Calculation for Uneven Cash Flow Project

Problem Statement

A company is considering a project with an initial investment of ₹50,000. The


expected cash inflows over the years are as follows:

Year Cash Inflow (₹)

1 12000

2 14000

3 10000

4 8000

5 6000

Let’s calculate the ROI and NPV for the uneven cash flow project.

✅ Given:

 Initial Investment = ₹50,000


 Cash Inflows:

Year Cash Inflow (₹)


1 12,000
2 14,000
3 10,000
4 8,000
5 6,000

 Total Cash Inflow = ₹12,000 + ₹14,000 + ₹10,000 + ₹8,000 + ₹6,000 = ₹50,000


 Assume Discount Rate = 10% for NPV calculation
✅ 1. ROI (Return on Investment)
Formula:
ROI=(Net Profit / Investment)×100

Net Profit = Total inflow – Initial Investment


= ₹50,000 – ₹50,000 = ₹0

👉 ROI = (0 / 50,000) × 100 = 0%

🟡 No gain or loss, just breakeven.

✅ 2. NPV (Net Present Value)


Formula:
NPV=∑(Cash Inflow / (1+r)n)−Initial Investment

Where r = 10% (0.10)

Year Cash Inflow (₹) PV Factor @10% Present Value (₹)


1 12,000 0.909 10,908
2 14,000 0.826 11,564
3 10,000 0.751 7,510
4 8,000 0.683 5,464
5 6,000 0.621 3,726
Total PV = ₹39,172

Now,
NPV=₹39,172−₹50,000=–₹10,828

3. Problem Statement
A company invests ₹40,000 in a project that is expected to generate annual cash
inflows of ₹10,000 for 5 years. The discount rate is 10%. Calculate the Return on
Investment (ROI) and Net Present Value (NPV).

✅ Given:

 Initial Investment = ₹40,000


 Annual Cash Inflows = ₹10,000 (for 5 years)
 Discount Rate (r) = 10%

✅ 1. Return on Investment (ROI)


Formula:

ROI=(Net Profit / Investment)×100

Total Inflows over 5 years:

₹10,000×5=₹50,000₹10,000 \times 5 = ₹50,000₹10,000×5=₹50,000

Net Profit = ₹50,000 – ₹40,000 = ₹10,000

ROI=(10,00040,000)×100=25%

✅ 2. Net Present Value (NPV)


Formula:

NPV=∑(Cash Inflow / (1+r)n)−Initial Investment

Using PV factor @10% for each year:

Year Cash Inflow PV Factor @10% Present Value


1 ₹10,000 0.909 ₹9,090
2 ₹10,000 0.826 ₹8,260
3 ₹10,000 0.751 ₹7,510
4 ₹10,000 0.683 ₹6,830
5 ₹10,000 0.621 ₹6,210
₹37,900
NPV=₹37,900−₹40,000=−₹2,100
🔍 Summary:
Metric Value
Initial Investment ₹40,000
Total Inflows ₹50,000
Net Profit ₹10,000
ROI 25%
–
NPV @10%
₹2,100

📌 Interpretation:

 ROI of 25% indicates a nominal gain.


 But a negative NPV means the project's returns do not meet the 10% required rate of
return.
 So, it may not be considered a value-adding investment if 10% is the benchmark.

You might also like