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    Investment Criteria

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    GOWTHAM K K
    The document provides project details for evaluating a proposed investment in buildings and machinery over 8 years. In year 1, sales are expected to be 800,000 units at Rs. 5 per unit. Total variable costs are estimated to be Rs. 3,600,000. Administrative expenses are Rs. 300,000 and depreciation is Rs. 200,000, resulting in a loss before taxes of Rs. 100,000. Annual growth rates are provided for sales, prices, and costs. The net present value (NPV), internal rate of return (IRR), benefit-cost ratio (BCR), and payback period are to be calculated using a 10% discount rate.

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    Investment Criteria

    Uploaded by

    GOWTHAM K K
    33 views15 pages
    The document provides project details for evaluating a proposed investment in buildings and machinery over 8 years. In year 1, sales are expected to be 800,000 units at Rs. 5 per unit. Total variable costs are estimated to be Rs. 3,600,000. Administrative expenses are Rs. 300,000 and depreciation is Rs. 200,000, resulting in a loss before taxes of Rs. 100,000. Annual growth rates are provided for sales, prices, and costs. The net present value (NPV), internal rate of return (IRR), benefit-cost ratio (BCR), and payback period are to be calculated using a 10% discount rate.

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    Investment Criteria.xlsx

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    The document provides project details for evaluating a proposed investment in buildings and machinery over 8 years. In year 1, sales are expected to be 800,000 units at Rs. 5 per unit. Total variable costs are estimated to be Rs. 3,600,000. Administrative expenses are Rs. 300,000 and depreciation is Rs. 200,000, resulting in a loss before taxes of Rs. 100,000. Annual growth rates are provided for sales, prices, and costs. The net present value (NPV), internal rate of return (IRR), benefit-cost ratio (BCR), and payback period are to be calculated using a 10% discount rate.

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
    Download as xlsx, pdf, or txt
    33 views15 pages

    Investment Criteria

    Uploaded by

    GOWTHAM K K
    The document provides project details for evaluating a proposed investment in buildings and machinery over 8 years. In year 1, sales are expected to be 800,000 units at Rs. 5 per unit. Total variable costs are estimated to be Rs. 3,600,000. Administrative expenses are Rs. 300,000 and depreciation is Rs. 200,000, resulting in a loss before taxes of Rs. 100,000. Annual growth rates are provided for sales, prices, and costs. The net present value (NPV), internal rate of return (IRR), benefit-cost ratio (BCR), and payback period are to be calculated using a 10% discount rate.

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    © All Rights Reserved
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    You are on page 1of 15

    Benefit Cost Ratio

    Discount rate, r % 10.00

    Year end, t---> 0 1 2 3 4 5


    Net Cash Flow (Rs) -20 5 5 15 20 20
    Discount factor 1.00 0.91 0.83 0.75 0.68 0.62
    Present Value of Outflow (Rs) -20.00
    Present Value of Inflows (Rs) 4.55 4.13 11.27 13.66 12.42

    PV of Costs (Rs) 20.00


    PV of Benefits (Rs) 84.14

    Benefit Cost ratio 4.21 = C13/C12

    NPV (Rs) 64.14 =NPV(DiscountRate,5,5,15,20,20,20,25,30)-20


    IRR 52%
    Payback period (Yrs) 2-3 yrs

    In Excel's NPV formula, summation is from 1 to n, and not from 0 to n.


    6 7 8
    20 25 30
    0.56 0.51 0.47 =1/(1+r)^t
    Total
    11.29 12.83 14.00 84.14
    After year
    1 2 3 4 5 6 7 8
    Project-A -100 0 0 0 0 0 250

    Project-B -100 50 50 50 50 50
    Project-C -100 0 0 50 50 50 50 50
    Project-D -50 -50 50 50 50 50 50

    Project-E -20 0 10 20 30 40 50 60
    Project-F -20 -30 60 50 40 30 20 10

    Project-G -20 0 0 0 20
    Project-H -20 10 10 0 20 0 50

    Discount rate % 10.00 Excel Formula:


    =NPV(DiscountRate,CashFlowStream)
    =IRR(CashFlowStream)
    Do It Yourself
    Investment Criteria
    IRR NPV PB period

    X
    Investment Criteria
    IRR NPV, Rs PB period
    16.499% 37.38 7th year

    41.041% 81.40 3rd year


    20.980% 51.49 5th year
    32.472% 69.87 2nd year

    64.440% 97.85 5th year


    -341.979% 92.95 3rd year

    0.000% (5.76) 5th year


    48.608% 35.67 3rd year
    Item After Year ----> 1 2 3
    Sales (000 units) 400 400.0 400.0
    Unit Selling Price (Rs/unit) 5 5.0 5.0
    Revenue (000 Rs) 2000 2000.0 2000.0
    Unit Material Cost (Rs/unit) 2.5 2.5 2.5
    Unit Labour Cost (Rs/unit) 2 2.0 2.0
    Total Variable Cost (Rs/unit) 1800 1800.0 1800.0
    Contribution margin (000 Rs) = Revenue-Total Variable Cost 200 200.0 200.0

    Discount rate, r 0.1

    Present value of Contribution margin (000 Rs) 181.8 165.3 150.3


    Using Excel NPV formula 1067.0
    Sensitivity Analysis
    Sales growth, s, %
    4 5 6 7 8 Change, % pa s
    400.0 400.0 400.0 400.0 400.0 0% 0
    5.0 5.0 5.0 5.0 5.0 0% 1
    2000.0 2000.0 2000.0 2000.0 2000.0 2
    2.5 2.5 2.5 2.5 2.5 0% 3
    2.0 2.0 2.0 2.0 2.0 0%
    1800.0 1800.0 1800.0 1800.0 1800.0
    200.0 200.0 200.0 200.0 200.0 Sensitivity Analysis
    Discout rate, r, fraction
    r
    PV Sum 0.10
    136.6 124.2 112.9 102.6 93.3 1067.0 0.12
    Above value 0.16
    =200/(1+0.1)^5 0.20
    0.25
    Sensitivity Analysis
    Sales growth, s, %
    1067.0
    1067
    26317
    322079
    2108416

    Sensitivity Analysis Sensitivity Analysis


    Discout rate, r, fraction Discount rate, r (vertical) and Sales growth, s (horizontal)
    1067.0 1067.0 0 1 2 3
    1067 0.10 1067 26317 322079 2108416
    994 0.12 994 23271 281796 1838048
    869 0.16 869 18354 217421 1407687
    767 0.20 767 14634 169431 1088613
    666 0.25 666 11187 125686 799572
    Project details- Own initial investment in buildings and machinery Rs 1000K in year-0, operational life of project 8 ye
    years of operation. In year-1, expected sales 800K units, selling price- Rs 5/unit, unit material cost- Rs 2.5/unit, unit la
    Depreciation rate 20% on building and machinery- (Straight Line Method). Annual increase expected- Sales 6%, unit s
    Administrative and other expenses-3%. Income tax rate 10%. Discount rate (Cost of capital) 10%. Determine NPV, IRR

    Item/Year 0 1
    Investment (Rs 000)
    Salvage value (Rs 000)
    Sales (000 units)
    Unit Selling Price (Rs/unit)
    Revenue (000 Rs)
    Unit Material Cost (Rs/unit)
    Unit Labour Cost (Rs/unit)
    Total Variable Cost (Rs/unit)
    Administrative and other expenses (Rs 000)
    Depreciation (Rs 000)
    Profit Before Income Tax(Rs 000)
    Income Tax
    Profit After Income Tax
    Net cash flow (Rs 000)

    Discount rate, %

    Present value of cash flows (000 Rs)


    NPV, use Excel formula

    IRR, using Excel formula


    BCR
    Payback period
    year-0, operational life of project 8 years, salvage value of buildings and machinery Rs 50K after 8
    unit material cost- Rs 2.5/unit, unit labour cost-Rs 2/unit, administrative and other expenses Rs 300K.
    ual increase expected- Sales 6%, unit selling price-5%, unit material cost-4%, unit labour cost- 4.5%,
    st of capital) 10%. Determine NPV, IRR, BCR and Payback period.
    16/2

    2 3 4 5 6 7 8 Increase, % pa

    DO IT YOURSELF

    Sum (NPV)
    IT YOURSELF
    Project details- Own initial investment in buildings and machinery Rs 1000K in year-0, operational life of project 8 years
    after 8 years of operation. In year-1, expected sales 800K units, selling price- Rs 5/unit, unit material cost- Rs 2.5/unit, un
    expenses Rs 300K. Depreciation rate 20% on building and machinery- (Straight Line Method). Annual increase expected
    cost-4%, unit labour cost- 4.5%, Administrative and other expenses-3%. Income tax rate 10%. Discount rate (Cost of capi
    period.
    Project details- Own initial investment in buildings and machinery Rs 1000K in year-0, operational life of project 8 years
    after 8 years of operation. In year-1, expected sales 800K units, selling price- Rs 5/unit, unit material cost- Rs 2.5/unit, un
    expenses Rs 300K. Depreciation rate 20% on building and machinery- (Straight Line Method). Annual increase expected
    cost-4%, unit labour cost- 4.5%, Administrative and other expenses-3%. Income tax rate 10%. Discount rate (Cost of capi
    period.

    Item/Year 0 1 2 3
    Investment (Rs 000) 1000
    Salvage value (Rs 000)
    Sales (000 units) 800 800 800
    Unit Selling Price (Rs/unit) 5 5.0 5.0
    Revenue (000 Rs) 4000 4000 4000
    Unit Material Cost (Rs/unit) 2.5 2.5 2.5
    Unit Labour Cost (Rs/unit) 2 2.0 2.0
    Total Variable Cost (Rs/unit) 3600 3600 3600
    Administrative and other expenses (Rs 000) 300 300 300
    Depreciation (Rs 000) 200 200 200
    Profit Before Income Tax(Rs 000) -100 -100 -100
    Income Tax 0.0 0.0 0.0
    Profit After Income Tax -100 -100 -100
    Net cash flow (Rs 000) -1000 100 100 100

    Discount rate, % 10.00

    Present value of cash flows (000 Rs) -1000.0 90.9 82.6 75.1
    NPV, use Excel formula -461.0

    IRR, using Excel formula -4.2%


    BCR 0.010
    Payback period 4-5 yrs
    nal life of project 8 years, salvage value of buildings and machinery Rs 50K
    erial cost- Rs 2.5/unit, unit labour cost-Rs 2/unit, administrative and other
    nnual increase expected- Sales 6%, unit selling price-5%, unit material
    scount rate (Cost of capital) 10%. Determine NPV, IRR, BCR and Payback
    nal life of project 8 years, salvage value of buildings and machinery Rs 50K
    erial cost- Rs 2.5/unit, unit labour cost-Rs 2/unit, administrative and other
    nnual increase expected- Sales 6%, unit selling price-5%, unit material
    scount rate (Cost of capital) 10%. Determine NPV, IRR, BCR and Payback

    4 5 6 7 8

    50.0 Increase, % pa
    800 800 800 800 800 0.0%
    5.0 5.0 5.0 5.0 5.0 0.0%
    4000 4000 4000 4000 4000
    2.5 2.5 2.5 2.5 2.5 0.0%
    2.0 2.0 2.0 2.0 2.0 0.0%
    3600 3600 3600 3600 3600
    300 300 300 300 300 0.0%
    200 200 0 0 0 Assets depreciate 100% in 5 years
    -100 -100 100 100 150
    0.0 0.0 10.0 10.0 15.0 Pay tax only if PBT>0.
    -100 -100 90 90 135
    100 100 90 90 135 Depreciation added to PAT

    NPV = Sum of Present Value


    68.3 62.1 50.8 46.2 63.0 -461.0

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