3) A company is considering the following investment projects. Projects Initial - Investment - Cash Flows A - 10,00,000 - 12,00,000 8,00,000 Nil B - 10,00,000 - 8,00,000 10,00,000 12,00,000 C - 10,00,000 - 3,00,000 5,00,000 5,00,000 D - 10,00,000 - 10,00,000 6,00,000 3,00,000 Find out payback period, and net present value and rank the projects according to them. Assume discount rate 10% and 20%.

 

TUTOR MARKED ASSIGNMENT 

COURSE CODE : MCO-07 

COURSE TITLE : Financial Managements 

ASSIGNMENT CODE : MCO-07/TMA/2022-2023 

COVERAGE : ALL BLOCKS 

3) A company is considering the following investment projects. 

Projects Initial - Investment - Cash Flows

A - 10,00,000 - 12,00,000 8,00,000 Nil 

B - 10,00,000 - 8,00,000 10,00,000 12,00,000 

C - 10,00,000 - 3,00,000 5,00,000 5,00,000 

D - 10,00,000 - 10,00,000 6,00,000 3,00,000 

 

Find out payback period, and net present value and rank the projects according to them. Assume discount rate 10% and 20%.

Answer 

To calculate the payback period for each project, we need to calculate the cumulative cash flow for each year and determine the year in which the initial investment is recovered. 

Payback period:

The payback period is the amount of time it takes for the initial investment to be recovered from the project's cash flows. To calculate the payback period, you need to find the year in which the cumulative cash flow first becomes positive. You can do this by adding up the cash flows for each year until you reach a cumulative positive cash flow that is equal to or greater than the initial investment. The payback period is the number of years it took to reach that point. In some cases, you may need to use a formula to calculate the payback period more precisely, taking into account the cash flows that occur in the year that the initial investment is recovered.

Net present value (NPV):

The net present value (NPV) is the difference between the present value of the cash inflows and the present value of the cash outflows for a given investment project. To calculate the NPV, you need to discount each cash flow by the appropriate discount rate and sum them up. The formula for NPV is:

NPV = CF0 + (CF1 / (1+r)^1) + (CF2 / (1+r)^2) + ... + (CFn / (1+r)^n)

where CF0 is the initial cash flow, CF1 to CFn are the cash flows in years 1 to n, r is the discount rate, and n is the number of years.

Ranking the projects:

To rank the projects based on their payback period and NPV values, you need to compare the values for each project. For payback period, the shorter the period, the better the project. For NPV, the higher the value, the better the project. You can use the values to rank the projects in order of preference, with the best project ranked first and the worst project ranked last.

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