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Assignment of Advanced project management

Calculate the following Net present Value and other investment criteria show the details on
the attached answer sheet

Years Cash Net income Average book value Interest rate


flows
Year 0 160000 - 70000 12%
Year 1 60000 13000
Year 2 70000 3000
Year 3 90000 29000

1. Commute NPV for the project? Do we accept the project or reject the project?
2. Compute payback for the project Assume we will accept the project if it payback within
two years Do we accept or reject the project?
3. Compute Discount payback for the project. Assume we will accept the project if it
payback within two years on discounted basis . Do we accept or reject the project?
4. Compute Average Accounting Return for the project assuming we require an average
accounting return of 25% . Do we accept or reject the project ?
5. Compute IRR for the project? ASSUMING IRR 16.13%>12% required return .Do we
accept or reject the project?

Solution
𝐶𝐹1 𝐶𝐹1 𝐶𝐹1 60000 70000 90000
1. NPV= _CF0(+�1+𝐾� +�1+𝐾�2 +�1+𝐾�3 = -1600000+((+�1+0.12� +�1+0.12�2 +�1+0.12�3
NPV=-
160000+(53571.4286+55803.5714+63862.3978)
NPV=13237.398
 The Net present Value (NPV) is positive, so we will accept the project.
2. Assume we will accept the project if we will recover the cash flows within two years, so
we calculate it as follows:-
 Year1 160000-60000=100000
 Year2 100000-70000=30000
 Year 3 30000-90000=-60000 But the project payback is in three years, so we
will reject the project.
3. Assume we will accept the project if it pays back on a discounted basis in 2 years.
, so we will calculate in the following ways:-
� 60000
 Year 1: 160000- ��1.12�1) )=106428.57

� 70000
 Year 2: 106428.57- ��1.12� 2))=50624.999

� 90000
 Year 3:50624.999- ��1.12� 3)=-13237.399

We will reject the project, because it does not payback discounted on the bias of
two years.
4. Assume we require an average accounting return of 25%; Present Rate
Average net income
� 13000 � 3000 � 29000��
 3 =15000
15000
 AAR = =.214 =21.4%
70000
 The present rate is 25%, but 21.4% is less than the present rate, so we will reject
the project.
5. Net present Value (NPV) profile for the project
N PV 50914.4 42420.9 34469.3 27014.2 20015. 13237.4 7241.7 1037 -4104.9
Discount 0.02 0.04 0.06 0.08 0.1 0.12 0.14 0.1613 0.18
ra t e

 Depend on the above NPV profile of the project the NPV is positive on 16.13%> 12% so,
we will accept the Project in case of IRR

Summary of Decisions For The Project

Name summary
Net present Value Accept
Payback period Reject
Discounted payback period Reject
Average Accounting Return Reject
Internal rate of return Accept

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