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Capital Budgeting 129
Note : The following are the present value factors @ 10% p.a.
Solution
Year 1 2 3 4 5 6
Factor 0.909 0.826 0.751 0.683 0.621 0.564
(MBA, Madurai-Kamaraj University, May 2005)
Cash Inflows Present Present Value of Net Cash
Value of Rs. Inflow
Year Project X Rs. Project Y Rs. 1 @ 10% Project X Rs. Project Y Rs.
1 5,000 20,000 0.909 4,545 18,180
2 10,000 10,000 0.826 8,260 8,260
3 10,000 5,000 0.751 7,510 3,755
4 3,000 3,000 0.683 2,049 2,049
5 2,000 2,000 0.621 1,242 1,242
Scrap Value 1,000 2,000 0.621 621 1,245
Total present valueInitial 24,227 34,728
investments 20,000 30,000
Net present value 4,227 4,728
Project Y should be selected as net present value of project Y is higher.
Exercise 7
The following are the cash inflows and outflows of a certain project.
Year Outflows Inflows
0 1,75,000 -
1 5,50,000 35,000
2 45,000
3 65,000
4 85,000
5 50,000
The salvage value at the end of 5 years is Rs. 50,000. Taking the cutoff rate as 10%,
calculate net present value.
Year 1 2 3 4 5
P.V. 0.909 0.826 0.751 0.683 0.621
Solution
Year Cash Inflows Present Value Present Value
Rs. Factor @ 10% of Cash Inflows
1 35,000 0.909 31,815
2 45,000 0.826 37,170
Contd....