Corporate Finance (Fin622)”
Assignment No. 1 Marks: 20
Being the finance manager of XYZ Company, you are to select one project of two available options i.e. Project A and Project B. The relevant cash flows for both the projects are summarized in given table.
Project A
Project B
Initial investment
Rs. 57,000
Rs. 54,000
Year(n)
Cash inflows (CFn)
Cash inflows (CFn)
1
Rs. 20,000
Rs. 22,000
2
20,000
20,000
3
20,000
18,000
4
20,000
16,000
Assume the discount rate to be 14 percent.
Required:
• Calculate the payback period of each project.
• Calculate the Net present value (NPV) of each project.
• On the basis of results of pay back period and NPV, which project would you recommend to your company and why?

“Corporate Finance 
Q.1: Calculate the payback period of each project.
For Project A
Year  0  1  2  3  4 
Project A  57,000  20,000  20,000  20,000  20,000 
The formula of Payback period is,
PP=Io/Ct
PP=57,000/20,000
PP=2.85years
For Project B
Year  0  1  2  3  4 
Project B  54000  22,000  20,000  18,000  16,000 
Payback period is lies between year 2 and year 3 .Sum of money recovered by the end of the second year
= (22,000+20,000)
= 42,000
=54,000 – 42000
= 12,000
PP= (2+12,000/18,000)
PP=2.67years
Q.2: Calculate the Net present value (NPV) of each project.
For Project A
Year  0  1  2  3  4 
Project A  57,000  20,000  20,000  20,000  20,000 
NPV=Cf [(1/i1/i (1+i)]Ct
NPV=20,000[(1/.14  1/.14 (1+.14) ^4)]57,000
NPV=20,000[(7.1429 – 1/ 0.2365)] – 57,000
NPV=20,000 (7.1429 – 4.2283) – 57,000
NPV= 20,000 *(2.9146) – 57000
NPV=58291 – 57,000
NPV=1291
For Project B
Year  0  1  2  3  4 
Project B  54000  22,000  20,000  18,000  16,000 
NPV= [Cf1/ (1+i) + Cf2/ (1+i) ^2+ Cf3/ (1+i) ^3+ Cf4/ (1+i) ^4] Ct
NPV= [22,000 / (1+.14) +20,000/ (1+.14) ^2+18,000/ (1+.14) ^3+16,000 / (1+.14) ^4]  54000
NPV=19298+15389+12150+947354000
NPV=56310 – 54000...