Business Finance: NPV and IRR Calculation

1
Business finance

2
Table of Contents
Part B...............................................................................................................................................3
a)..................................................................................................................................................3
b)..................................................................................................................................................4
c)..................................................................................................................................................5
d)..................................................................................................................................................8
References......................................................................................................................................11

3
Part B
a)
Initial Outflow
Particulars Amount
Investment in
2020
16000000
Investment in
2021
2000000
Total 18000000
Terminal cash flow:
Particulars Amount
Salvage value of
asset
3000000
Tax@30% 900000
After tax value 2100000
working capital
recovery
3000000
Total 5100000
Particulars 2021 2022 2023 2024 2025 2026 Total
Revenue 1400000
0
2000000
0
2000000
0
2000000
0
2000000
0
2000000
0
Cost saving 2000000 3500000 3500000 3500000 3500000 3500000
Total incremental
income
1600000
0
2350000
0
2350000
0
2350000
0
2350000
0
2350000
0
Cost of goods sold 1050000
0
1500000
0
1500000
0
1500000
0
1500000
0
1500000
0
Depreciation 3000000 3000000 3000000 3000000 3000000 3000000
Profit before tax 2500000 5500000 5500000 5500000 5500000 5500000
Tax @ 30% 750000 1650000 1650000 1650000 1650000 1650000
Profit after tax 1750000 3850000 3850000 3850000 3850000 3850000
Add: depreciation 3000000 3000000 3000000 3000000 3000000 3000000
Less: Working
capital
-
2100000
-900000
cash inflow 2650000 5950000 6850000 6850000 6850000 6850000
Cash outflow 2000000
Terminal cash flow 5100000
Net cash flow 650000 5950000 6850000 6850000 6850000 1195000
0
PVF@15% 0.86956
52
0.75614
4
0.65751
6
0.57175
3
0.49717
7
0.43232
8

4
PV 565217.
39
4499055 4503986 3916510 3405661 5166315 2205674
4
Initial outflow -
1600000
0
NPV 6056743
.5
The calculation for the net present value has been made and it can be seen that the same is
positive. This shows that the business will be making the profits and so the proposal shall be
accepted.
Calculation of
IRR
Particulars Amount
Year 2020 -
16000000
Year 2021 650000
Year 2022 5950000
Year 2023 6850000
Year 2024 6850000
Year 2025 6850000
Year 2026 11950000
IRR 25.04%
The discount rate of the company is 15% and the IRR is determined to be 25.04%. As the IRR is
more than that of the cost of capital, the project will, therefore, be taken into consideration and
company will be performing accordingly.
b)
The hurdle rate is the rate by which the minimum return on the investments will be made. At this
rate all the risks are considered and then the amount which will be attained after considering
them is ascertained. Prescott is uneasy in using this rate as this is different from the discount rate.
In case of the discount rate the original return which will be available are determined and they
consider all the aspects in that. All of the changes which will be taking place in the business with
the time are taken into use while determining the discount rate (Lane and Rosewall, 2015). The