TECHNIQUES OF CAPITAL BUDGETING

1.(a) NPV of the project at a discount rate of 14%.

= - 1,000,000 + 100,000 + 200,000 ---------- ------------ (1.14) (1.14)2 + 300,000 + 600,000 + 300,000 ----------- ---------- ---------- (1.14)3 (1.14)4 (1.14)5

= - 44837

(b) NPV of the project at time varying discount rates

= - 1,000,000

+ 100,000

(1.12)

+ 200,000 (1.12) (1.13)

+ 300,000 (1.12) (1.13) (1.14)

+ 600,000 (1.12) (1.13) (1.14) (1.15)

+ 300,000 (1.12) (1.13) (1.14)(1.15)(1.16)

= - 1,000,000 + 89286 + 158028 + 207931 + 361620 + 155871 = - 27264
1. IRR (r) can be calculated by solving the following equations for the value of r. 60000 x PVIFA (r,7) = 300,000

i.e., PVIFA (r,7) = 5.000 Through a process of trial and error it can be verified that r = 9.20% pa.

2. The IRR (r) for the given cashflow stream can be obtained by solving the following equation for the value of r.

-3000 + 9000 / (1+r) – 3000 / (1+r) = 0

Simplifying the above