Question

Mr. Mehta works as a Management Consultant in XYZ Ltd and his role involved analyzing capital investment projects. His manager asked him to analyze project X which involved capital investments of ₹10,00,000 and the cost of capital of 12%. The projects net cash flows are as follows:

Years 2 3 40,000 Cash 20,000 30,000 45,000 50,000 Inflow

Calculate:

a. Net Present Value of the project and suggest whether project is to be accepted or not

b. Internal rate of return and suggest whether project is to be accepted or not

Answer 1

a. Net present value can also be calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$10,000,000. Indicate the initial cash flow by a negative sign since it is a cash outflow.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the NPV button and enter the cost of capital of 12%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.

The net present value is $872,786.17.

The project should be accepted according to the net present value method since the project generates a positive net present value.

b.Internal rate of return can be calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$10,000,000. It is entered with a negative sign since it is a cash outflow.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the IRR button and enter the interest rate to get the IRR of the project.

The IRR is -36.14%.

The project should not be accepted according to the internal rate of return method since the internal rate of return is lesser than the cost of capital.

In case of any query, kindly comment on the solution.