Financial Analysis and Project Feasibility

This document presents a solved homework assignment focusing on financial analysis and project feasibility. It covers key concepts such as Net Present Value (NPV), Internal Rate of Return (IRR), and terminal cap rate. The assignment evaluates the feasibility of a project by comparing the NPV with the initial cost, concluding that the project is not viable due to the NPV being less than the machinery cost. It also explains the importance of considering the time value of money in financial decision-making and how it impacts the IRR. Additionally, the document includes a table showing present value factors and NPV calculations at various IRR levels, further illustrating the project's financial performance under different scenarios.

Answer 1
As per the Row 12, we have computed Cost as per IRR and the cost works out to $1359036. Actual
cost of the Machinery to be purchased is $2000000. hence the NPV is less than the Cost of Machinery.
Project is hence not feasible
The Discounted Cash flow method takes into consideration Time value of money.
Direct Cap method does not take into consideration Time Value of Money.
The expected return or the IRR is not considered in Direct Cap Method and hence the value result
changes
The IRR is the interest earned / forgone during the project period which is very crucial for Decision
making and identifying the viability of the project
The Yeild to Maturity rate is different than the IRR Method in a way that the YTM rate assumes the
investment is already made and the coupon interest earned is assumed to be reinvested back into the
project is the assumption
Answer 2
Project is not feasible, as the Net present value after discounting at the rate of 10% of the project with
a fixed 3 year return and perpetual increase in return post 4 years at 8% consistency works out to
$1359036
The project cost - in terms of purchasing of machinery is $2000000.
The same is higher than the NPV
It implies that the project is not worthy of giving $2000000 considering the Time value of money and
hence not viable
Answer 3
Terminal Cap rate is that rate which is constant for future cash inflows.
It means, that the project shall earn a consistent return of a particular amount at the perpetual
growth rate which is known as the terminal Cap rate
It is a very important concept in Time value of money, because the earning in the project are for
lifetime / till the project is wound up
The IRR gets impacted in the sense that the accurate result is not provided without considering the
time value of money
Answer 4
Present Value factor at various IRR Levels
IRR 10% 11% 12% 13% 14%
1 1 1 1 1
0.909 0.901 0.893 0.885 0.877
0.826 0.812 0.797 0.783 0.769
0.751 0.731 0.712 0.693 0.675
15% 16% 17% 18% 19%

1 1 1 1 1
0.870 0.862 0.855 0.847 0.840
0.756 0.743 0.731 0.718 0.706
0.658 0.641 0.624 0.609 0.593
20% 21% 22% 23% 24%
1 1 1 1 1
0.833 0.826 0.820 0.813 0.806
0.694 0.683 0.672 0.661 0.650
0.579 0.564 0.551 0.537 0.524
25% 26%
1 1
0.800 0.794
0.640 0.630
0.512 0.500
Net Present Value at the above IRR levels
10% 11% 12% 13% 14%
-2000000
-
2000000
-
2000000
-
2000000 -2000000
101813 100896 99995 99110 98240
93331 91657 90028 88441 86897
1163892 1132718 1102647 1073632 1045625
NPV= -640964 -674729 -707330 -738817 -769238
15% 16% 17% 18% 19%
-2000000
-
2000000
-
2000000
-
2000000 -2000000
97386 96547 95721 94910 94113
85392 83926 82497 81105 79748
1018585 992468 967237 942854 919284
NPV= -798637 -827059 -854544 -881130 -906855
20% 21% 22% 23% 24%
-2000000
-
2000000
-
2000000
-
2000000 -2000000
93328 92557 91798 91052 90318
78424 77133 75874 74645 73446
896493 874449 853122 832483 812504
NPV= -931754 -955861 -979206
-
1001820 -1023732

25% 26%
-2000000
-
2000000
89595 88884
72276 71133
793160 774424
NPV= -1044969
-
1065558