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Cap Budget - Add Practice

1. A project with annual cash inflows of Rs 6,500-8,000 and a discount rate of 14% has a discounted payback period of 3.39 years and an NPV of Rs 2,889. 2. A project with annual cash flows of Rs 24,000 for nine years costing Rs 110,000 today has an NPV of Rs 39,926 and IRR of 16.15% at an 8% required rate of return. 3. A project costing Rs 400,000 that pays Rs 50,000 forever has a payback period of 8 years, NPV of Rs 100,000, and discounted payback period of 16.89 years at a 10%

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554 views

Cap Budget - Add Practice

1. A project with annual cash inflows of Rs 6,500-8,000 and a discount rate of 14% has a discounted payback period of 3.39 years and an NPV of Rs 2,889. 2. A project with annual cash flows of Rs 24,000 for nine years costing Rs 110,000 today has an NPV of Rs 39,926 and IRR of 16.15% at an 8% required rate of return. 3. A project costing Rs 400,000 that pays Rs 50,000 forever has a payback period of 8 years, NPV of Rs 100,000, and discounted payback period of 16.89 years at a 10%

Uploaded by

Anjit Singh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Additional practice: capital Budget

1. An investment project has annual cash inflows of Rs 6,500, Rs 7,000, Rs 7,500, and Rs 8,000, and
a discount rate of 14 percent. What is the discounted payback period for these cash flows if the
initial cost is Rs 18,000? What is its NPV? Would you buy this project? DPBP 3.39 years, NPV
Rs 2889
2. A project that provides annual cash flows of Rs 24,000 for nine years costs Rs 110,000 today. Is
this a good project if the required rate of return is 8 percent? At what discount rate would you
be indifferent between accepting the project and rejecting it? NPV = Rs 39,926, IRR 16.15%
3. Nilakhi has an investment opportunity that costs Rs 400,000 and pays Rs 50,000 forever. She
prefers 10 percent discount rate on this type of project. What is the ordinary payback period?
What is the NPV? What is the discounted payback period? PBP = 8 years, NPV = Rs 100,000,
DPBP = 16.89 years
4. Your company has anticipated a growing opportunities to run cement factory in the Western
Nepal. Accordingly, you are estimating the benefits and costs associated with running the
cement factory. You anticipated that the project will produce a net cash flow of Rs 700,000 in
the first year which is expected to grow at a rate of 7 percent forever. The installation cost of
cement project is Rs 8,500,000. If the opportunity cost of capital is 14 percent, should your
company launch the new cement project? NPV = Rs 1500,000
5. There are two projects: Project A and Project B. Each of the project has the cost of Rs 100,000
and cost of capital for each project is 12 percent. The project’s expected net cash flows are as
flows:

Year Project A Project B


0 (Rs 100,000) (Rs 100,000)
1 65,000 35,000
2 30,000 30,000
3 30,000 30,000
4 10,000 10,000

a. Calculate NPV for each project. Which project or projects should be accepted if they are
independent?
b. Calculate IRR for each project. Which project should be accepted if they are mutually
exclusive?
Ans: a) Rs 9663.50, - Rs 17,123.50 b) 18.03%, 2.32%
6. Annapurna Trading is evaluating two mutually exclusive projects: Project A and Project B. The
company will require Rs 100,000 for project A and Rs 140,000 for project B. The net cash flows
of these projects are as follows:

Cash flows
Year A B
  (Rs 140,000) (Rs 140,000)
  Profit after tax
1 Rs 10,000 Rs 25,000
2 15,000 Rs 25,000
3 20,000 Rs 25,000
4 25,000 Rs 25,000
5 35,000 Rs 25,000
Both projects will be depreciated on straight line over a five year life and cost of capital of the
company is 12 percent.
a. Calculate the PBP of each project. If firm has set a maximum payback period of three years,
suggest as to which project is preferred.
b. What are the average rates of returns of both projects?
c. Evaluate the project on the basis of NPV.
d. What are the profitability indexes of both projects?
Ans: a) PBP = 2.88 and 2.64 years, b) ARR = 42% & 35.71% C) NPV = Rs 42,966 & 51054, PI
1.43 & 1.36
7. Project M has the following cash flows:

Year 0 1 2 3 4 5
Cash flows -150,000  - X 40,000 50,000 60,000 80,000

The weighted average cost of capital applicable to this project is 12 percent, and MIRR is 9.6545 percent.
a. What is the terminal value of the cash inflows?
b. What is year 1 cash flow? Ans: a) Rs 266,116 b) – Rs 19,996.67
8. Project x has annual cash flows of Rs 100,000 for the next 5 years and then Rs 150,000 each year
for the following 6 years. The IRR of the project is 15 per cent. What is the project’s NPV if firm’s
combined cost of capital is 12 per cent? [ NPV = Rs 92,970]

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