# 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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