Question

Q.3 A company has an investment opportunity costing · 40,000 with the following expected net cash flow
after taxes and before depreciation.
Year. Net cash flow
1 7,000
2 7,000
3 7,000
4 7,000
5 7,000
6 8,000
7 10,000
8 15,000
9 10,000
10 4,000
Using 10% as the cost of capital determine the flowing:
1. Payback period
2. Net present value at 10% discount factor
3. Internal rate of return with the help of 10% and 15% discount factor​

Answer 1

1. Payback Period = 5.62 years

2. Net Present Value= Rs. 8,961

3. Internal rate of Return = 14.7%

Explanation:

1. Payback Period:

 Initial Outlay = Rs. 40,000

 Cashflow for 5 years = Rs. 70,000 + Rs. 70,000 + Rs. 70,000 + Rs. 70,000

                                                  + Rs. 70,000

                                     = Rs. 35,000

 Balance Outlay = Rs. 40,000 - Rs. 35,000

                            = Rs. 5,000

 Cash Flow for 6 years = Rs. 8000

∴ Payback Period = 5years + $\frac{5000}{8000}$

                              = 5.62 years

2. Net Present Value:  

3. Internal rate of Return:

present value under 10% = Rs. 48,961

present value under 15% = Rs. 39,420

PV is less than Rs. 40,000. Hence, Internal Rate of Return is less than 15% but more than 10%.

Interest Rate = 10 + $\frac{48961 - 40000}{48961 - 39420}$ x 5

                     = 10 + 4.7%

                     = 14.7%

Pls refer to the attached pic below