PBP

Initial Cost Rs. 5,00,000 6,00,000

Cash Inflow Rs. 100000 till 5 years 150000

Scrap 80,000 4 years

50,000

PBP= IC/ even cash inflows

5,00,000/1,00,000

5 years

Initital Cost 100000 10%

CI 30000 0.909 27270 27270
35000 0.851 29785 57055
35000 0.756 26460 83515
25000 0.683 17075 100590
25000 0.621 15525 116115
20000 0.564 11280 127395
20000 0.513 10260 137655
20000 0.467 9340 146995
100000
NPV 46996

200000
30000 30000
35000 65000
35000 100000
25000 125000
25000 150000
20000 170000
20000 190000
20000 210000
7+ 10000/20000
EVEN CASH FLOWs
Profit 300000
Tax 150000
PAT 150000

add Dep
2000000*12.5 250000
400000

2000000/400000
5 years

UNEVEN CASH FLOWS Investment- 25000

CI CCI
1 5000 5000
2 8000 13000
3 10000 23000
4 12000 35000
5 7000 42000
6 3000 45000

PBP= P+ B/C
3+2000/12000

POST PAY BACK PROFITABILITY METHOD

Cash Outfl ANNUAL cash inflo Est life- 6 years

1,00,000 20000 20000
20000 40000
20000 60000
20000 80000
20000 100000
8000 108000 56000
8000 116000
8000 124000
8000 132000
8000 140000
16000 156000

56000/100000
PPBP= Cash Inflow (Est Life-PBP)
25000(6-4)
50000

PPBP Index Post Pay Back Profits/ In. Inv

50000/100000
50%
 30000
CI CCI
1 10000 10000
2 9000 19000
3 9000 28000
4 8000 36000
5 7000
scrap 4000
 FCI PV
100000 20000 19000
20000 18000
20000 17000
20000 16000
20000 15000
85000
100000
-15000

year CI PVF
1 500 0.909 454.5
2 500 0.826 413
3 4600 0.751 3454.6
4 10000 0.683 6830
TPV 11152.1
CO 10000
NPV 1152.1

Project X Project Y
Initial Inv 20000 30000
Est Life 5years 5years
Scrap 1000 2000

Project X Project Y
1 5000 0.909 4545 20000 0.909 18180
2 10000 0.826 8260 10000 0.826 8260
3 10000 0.751 7510 5000 0.751 3755
4 3000 0.683 2049 3000 0.683 2049
5 2000 0.621 1242 2000 0.621 1242
6 1000 0.621 621 2000 0.621 1242
24227 34728

NPV 4227 4728

Outflow Inflow

0 175000 PVF@10% 175000

1 50000 35000 0.909 31815 45450
2 45000 0.826 37170
3 65000 0.751 48815
4 85000 0.683 58055
5 50000 0.621 31050
Salvage 50000 0.621 31050
 237955 220450
Cutoff Rate 10%
npv 17505
PV

Initial Outlay 1,00,000

Est. Life 5 Years
Scrap 10000
1 2 3 4 5
PAT 6000 14000 24000 16000 nil
PVF @ 10% 0.909 0.826 0.751 0.683 0.621

dep (initial cost-Scrap)/life in years

(1,00,000-10000)/5
18000
PAT Dep CI PVF PV
1 6000 18000 24000 0.909 21816
2 14000 18000 32000 0.826 26432
3 24000 18000 42000 0.751 31542
4 16000 18000 34000 0.683 23222
5 0 18000 18000 0.621 11178
114190
100000
NPV 14190
Initial Outlay 300000
Est. Life 4 yr
Scrap 2000
1 2 3 4 5
PAT 34000 30000 28000 22000 18000
PVF @ 10% 0.909 0.826 0.751 0.683 0.621
12000 0.901 10812
4000 0.812 3248
2000 0.731 1462
10000 0.659 6590
22112

112

544

432

0.259259

2000 0.909 1818 2000 0.901 1802

2000 0.826 1652 2000 0.812 1624
4000 0.751 3004 4000 0.731 2924
20000 0.683 13660 20000 0.659 13180
20134 19530
134 470

0.39881
0.909 10000 9090
0.826 10000 8260
0.751 10000 7510
0.683 10000 6830
 Project A Project B
Cost 22000 20000

CI
1 12000 2000
2 4000 2000
3 2000 4000
4 10000 20000
28000
28000/4
7000
PVF

PVF 22000/7000
3.14

CI 10% PV CI 11% PV
12000 0.909 10908 12000 0.901 10812
4000 0.826 3304 4000 0.812 3248
2000 0.751 1502 2000 0.731 1462
10000 0.683 6830 10000 0.659 6590
22544 22112
22000 22000
NPV 544 NPV 112

10%+(544/432)*11%-10%

10%+1.26
11.26%

CI 15% PV CI 16% PV
2000 0.87 1740 2000 0.862 1724
2000 0.756 1512 2000 0.743 1486
4000 0.658 2632 4000 0.641 2564
20000 0.572 11440 20000 0.552 11040
17324 16814
20000 20000
NPV -2676 NPV -3186

15.83%
RISK ADJUSTED CUT_OFF RATE
Initial Inv. Rs. 150000 each

Inv. X
1 60000
2 45000
3 35000
4 30000

target roc 10%, risk premium rate are 2% ant 8% resp. for Project X and Project Y.

Investment X

Year DF 10%+2%=12% CI
1 0.893 60000 53580
2 0.797 45000 35865
3 0.712 35000 24920
4 0.636 30000 19080
133445
150000
-16555

CERTAINTY EQUIVALENT METHOD

Each project nvolves an investement of Rs. 50000

YEAR Project A Project B
Cash Inflows Cerainty Co-efficient Cash Inflows
1 35000 0.8 25000
2 30000 0.7 35000
3 20000 0.9 20000
Risk free cut off rate is 10%

YEAR Project A
Cash Inflows Certainty Co-efficient Certain Cash Flows
1 35000 0.8 28000
2 30000 0.7 21000
3 20000 0.9 18000
 Project X Project Y
Cost 100000 100000
Cash flows till 5 years
optimistic 60000 55000
Most Likely 35000 30000
Pessimistic 20000 20000
Cut off rate 15% 15%
CI Dicount Factor@15%
optimistic 60000 3.3522
Most Likely 35000 3.3522
Pessimistic 20000 3.3522

PROBABILITY TECHNIQUE

Project X Probability Project Y

Cost 10000 10000

1 10000 0.2 12000

2 18000 0.6 16000
3 8000 0.2 14000

DF@10%
1 0.909 10000 9090
2 0.826 18000 14868
3 0.751 8000 6008

Standard Deviation Method

Project X Project Y

3200 0.2 32000 0.1

5500 0.3 5500 0.4
7400 0.3 7400 0.4
8900 0.2 8900 0.1

Deviation From Mean Square of deviation Prob. Weighted Deviations

3200 -3050 9302500 0.2 1860500
5500 -750 562500 0.3 168750
7400 1150 1322500 0.3 396750
8900 2650 7022500 0.2 1404500
3830500
SD 1957.2
 Inv. Y
65000
55000
40000
40000

Project B
Cerainty Co-efficient
0.9
0.8
0.7

PVF @10%PV
0.909 25452
0.826 17346
0.751 13518
 56316
50000
NPV 6316

PV NPV
201132 101132 84371
117327 17327 566
67044 -32956 -32956
Risky

Probability

0.2
0.6
0.2

0.2 1818
0.6 8921
0.2 1202
1941
 DECISION TREE ANALYSIS

Mr. Kumar is considereing an investment proposal of Rs. 40000

The expected returns are:

Year-I
Event Cash Inflow Probability
i 16000 0.3
ii 24000 0.5
iii 20000 0.2
Year-II
16000 24000 20000
Cash Inflow ProbabilityCash Inflow Probability Cash Inflo
i 30000 0.2 40000 0.1 5000
ii 40000 0.6 60000 0.8 8000
iii 50000 0.2 80000 0.1 12000

using 10% as cost of capital. Advice about the acceptability of the proposal
Year I prob Year 2 prob NPV of Inflow
Year Prob Cash Inflow Prob Cash Inflow Joint Prob
0.2 30000 -676 0.06
0.3 16000 0.6 40000 7584 0.18
0.2 50000 15844 0.06

Cash outflow 5 24000 0.1 40000 14856 0.05

40000 0.8 60000 31376 0.4
0.1 80000 47896 0.05

0.2 20000 0.2 5000 -17690 0.04

0.5 8000 -15212 0.1
0.3 12000 -11908 0.06

Workings
0.909 16000 14544
0.826 30000 24780
39324
-676

Mr. X is considereing an investment proposal of Rs. 26000

The expected returns are:

Year-I
 Event Cash Inflow Probability
i 12000 0.2
ii 14000 0.6
iii 9000 0.2
Year-II
12000 14000 9000
Cash Inflow ProbabilityCash Inflow Probability Cash Inflo
i 18000 0.3 22000 0.2 28000
ii 20000 0.4 26000 0.7 32000
iii 20000 0.3 30000 0.1 35000

using 10% as cost of capital. Advice about the acceptability of the proposal
20000
Probability
0.2
0.5
0.3

Expected NPV
-40.56
1365.12
950.64

742.8
12550.4
2394.8

-707.6
-1521.2
-714.48
15019.92
9000
Probability
0.4
0.5
0.1