Net Present Value and Discount Rate

Topics: Net present value, Internal rate of return, Finance Pages: 6 (637 words) Published: January 21, 2014

When the cash flows are uniform
The cost of a proposal is $ 10,000. The cash flows are as follows: YearCash flows
12500
22500
32500
42500
52500
62500
Calculate Pay Back Period (PBP)

When the cash flows are not uniform
1.There are two Proposals. Proposal A and Proposal B. Both cost the amount of $ 60,000. The discount rate is 10%. The cash flows before depreciation and tax are as follows: Year Proposal A Proposal B

$ $
0 (60,000) (60,000)
118,00019,000
215,00017,000
318,00019,000
416,00014,000
519,00015,000
614,00013,000

Evaluate the above proposals according to:
1.Pay Back Period.
2.Accounting Rate of Return (ARR)
3.Net present value method (NPV)

Proposal A is better than B, because ARR and NPV are higher than Proposal B

2.There are two Proposals. Proposal A and Proposal B. Proposal A costs $ 80,000 and Proposal B costs $ 100,000. The discount rate is 10%. The cash flows before depreciation and tax are as follows: Year Proposal A Proposal B

$ $
113,00015,000
215,00014,000
318,00019,000
416,00016,000
519,00013,000
614,00013,000
716,00019,000
820,00015,000
9 0 18,000
10 017,000
Evaluate the above proposals according to:
1.ARR
2.NPV
3.Pay Back Period

We can select Proposal A, because ARR, NPV and PBP are positive and reject Proposal B

3.There are two Proposals. Proposal A and Proposal B. The discount rate is 8%. The cash flows before depreciation and tax are as follows:
Proposal A Proposal B

Year $ $
0(100,000)(120,000)
113,000 15,000
215,00014,000
318,00019,000
416,00016,000
519,00013,000
614,00013,000
716,00019,000
820,00015,000
9 13,000 18,000
10 14,00017,000
11 -14,000
12 -
Evaluate the above proposals according to:
1.NPV
2.Pay Back Period
3.ARR

4.There are Three Projects. Project A, Project B and Project C . The discount rate is 12%. The cash flows before depreciation and tax are as follows: A B C Year $ $$

0(40,000)(40,000) (40,000)
112,00013,000 14,000
29,00011,000 (2,000)
312,00010,000 12,000
4(6,000) 6,000 11,000
59,000 (3,000) 6,000
611,00012,000 11,000
710,00013,000 10,500

Evaluate the above proposals (a) mutually exclusive and (b) independent - according to: 1.ARR
2.NPV
3.Pay Back Period

5. There are Two Projects. Project A and Project B. The discount rate is 9%. The cash flows before depreciation and tax are as follows:
AB
Year $ $
0(45,000)(46,000)
115,00016,000
2 10,00015,000
312,00019,000
419,000(3,000)
522,000 14,000
611,00012,000
Evaluate the above proposals according to:

1.ARR
2.NPV
3.Pay Back Period

There are Two Projects. Project A and Project B. The discount rate is 11%. The cash flows before depreciation and tax are as follows:
AB
Year $ $
0(70,000)(70,000)
120,00019,000
2 15,00012,000
318,00014,000
4(19,000)(3,000)
528,000 24,000
617,00019,000
Evaluate the above proposals (a) mutually exclusive and (b) independent - according to: Evaluate the above proposals according to:
AB
ARR38%41%
NPV$-13,457$ -10482
PBP5.47 years5.21 years

1.ARR
2.NPV
3.Pay Back Period...
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