FIN622 Assignment 1 Fall 2012 Solution
Tuesday, November 20, 2012 Edit This
Net Present Value (NPV)
NPV = -Io + CF1 / (1+i)^1 + CF2 / (1+i)^2 + CF3 / (1+i)^3 + CF4 / (1+i)^4 +…….+ ∞
For Alpha:
Io= 20,000
i = initial investment for alpha = 14%
For Beta:
Io= 20,000
i = initial investment for Beta = 12%
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PV of Future Cash Flows of project ALPHA = 53428+ 63435 + 52956+ 37725
= 207547
PI= 207547/200000
ye calculation apni kr laina...main ny rounded kiya howa hy.... same isi tarah BETA ki b calculate krni hy.....just intial investment ki amount less nahi krni....balky intial investment ko divide krna hy
......................
Net Present Value (NPV)
NPV = -Io + CF1 / (1+i)^1 + CF2 / (1+i)^2 + CF3 / (1+i)^3 + CF4 / (1+i)^4 +…….+ ∞
For Alpha:
Io= 20,000
i = initial investment for alpha = 14%
For Beta:
Io= 20,000
i = initial investment for Beta = 12%
......................
Profitability Index (PI):
Profitability Index = PV of Future Net Cash Flows / Initial Investment Required
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Net Present Value (NPV)
NPV = -Io + CF1 / (1+i)^1 + CF2 / (1+i)^2 + CF3 / (1+i)^3 + CF4 / (1+i)^4 +…….+ ∞
For Alpha:
Io= 20,000
i = initial investment for alpha = 14%
For Beta:
Io= 20,000
i = initial investment for Beta = 12%
Profitability Index (PI):
Profitability Index = PV of Future Net Cash Flows / Initial Investment Required
PV of Future Cash Flows of project ALPHA = 53428+ 63435 + 52956+ 37725
= 207547
PI= 207547/200000
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Alpha: NPV = 7545.63
Beta: NPV = 243.8
Profitability index (PI):
Alpha: PI = 1.0377
Beta: PI = 1.0012
2) NPV of Alpha is higher, it is favorable
3) Profitability index of Alpha is higher
4) IRR of Alpha is higher so it is favorable project.
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Answer 4:
Using IRR criterion, project Beta IRR is higher than Project Alpha. So, Select Project Beta. Answer 4:
Using IRR criterion, project Beta IRR is higher than Project Alpha. So, Select Project Beta.
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NPV = -Io + CF1 / (1+i)^1 + CF2 / (1+i)^2 + CF3 / (1+i)^3 + CF4 / (1+i)^4 +…….+ ∞
For Alpha:
Io= 20,000
i = initial investment for alpha = 14%
For Beta:
Io= 20,000
i = initial investment for Beta = 12%
......................................
PV of Future Cash Flows of project ALPHA = 53428+ 63435 + 52956+ 37725
= 207547
PI= 207547/200000
ye calculation apni kr laina...main ny rounded kiya howa hy.... same isi tarah BETA ki b calculate krni hy.....just intial investment ki amount less nahi krni....balky intial investment ko divide krna hy
......................
Net Present Value (NPV)
NPV = -Io + CF1 / (1+i)^1 + CF2 / (1+i)^2 + CF3 / (1+i)^3 + CF4 / (1+i)^4 +…….+ ∞
For Alpha:
Io= 20,000
i = initial investment for alpha = 14%
For Beta:
Io= 20,000
i = initial investment for Beta = 12%
......................
Profitability Index (PI):
Profitability Index = PV of Future Net Cash Flows / Initial Investment Required
......................
Net Present Value (NPV)
NPV = -Io + CF1 / (1+i)^1 + CF2 / (1+i)^2 + CF3 / (1+i)^3 + CF4 / (1+i)^4 +…….+ ∞
For Alpha:
Io= 20,000
i = initial investment for alpha = 14%
For Beta:
Io= 20,000
i = initial investment for Beta = 12%
Profitability Index (PI):
Profitability Index = PV of Future Net Cash Flows / Initial Investment Required
PV of Future Cash Flows of project ALPHA = 53428+ 63435 + 52956+ 37725
= 207547
PI= 207547/200000
......................
Answers are
1: Net present values (NPV):Alpha: NPV = 7545.63
Beta: NPV = 243.8
Profitability index (PI):
Alpha: PI = 1.0377
Beta: PI = 1.0012
2) NPV of Alpha is higher, it is favorable
3) Profitability index of Alpha is higher
4) IRR of Alpha is higher so it is favorable project.
......................
Answer 4:
Using IRR criterion, project Beta IRR is higher than Project Alpha. So, Select Project Beta. Answer 4:
Using IRR criterion, project Beta IRR is higher than Project Alpha. So, Select Project Beta.
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