Net Cash Flows before Replacements | |
Particulars | $ |
Sale Revenues | 2500 |
Annual Operating Cost | -1200 |
Earning Before Depreciation and Tax | 1300 |
Depriciation | -400 |
Earning BeforeTax | 900 |
Tax @ 40% | -360 |
Earning After Tax | 540 |
Add:- Depriciation | 400 |
Net Cash Flows before Replacement | 940 |
Increamental cash Flows | ||||||
Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | ||
New Machine Cost | -2000 | |||||
After Tax Salvage Value , old machine | 400 | |||||
Sales Revenues | 2500 | 2500 | 2500 | 2500 | ||
Operating Costs except Depriciation | -280 | -280 | -280 | -280 | ||
Depriciation (As per rates given on $ 2000 cost) | -666.60 | -889.00 | -296.20 | -148.20 | ||
Operating Income | 1553.4 | 1331 | 1923.8 | 2071.8 | ||
Tax @ 40% | -621.36 | -532.4 | -769.52 | -828.72 | ||
After Tax Operating Income | 932.04 | 798.6 | 1154.28 | 1243.08 | ||
Add: - Depriciation | 666.60 | 889.00 | 296.20 | 148.20 | ||
Net Cash Flows after Replacements | 1598.64 | 1687.60 | 1450.48 | 1391.28 | ||
Cash Flows Before Replacements | -940.00 | -940.00 | -940.00 | -940.00 | ||
Incremental Cash Flows | -1600 | 658.64 | 747.60 | 510.48 | e451.28 |
Computation of NPV | |||
Year | Cash Flow | P.V. Factor | Present Value |
[Inflow/(outflow] | [@10 %] | [Cash Flow*P.V. Factor] | |
0 | -1600 | 1.0000 | -1600.00 |
1 | 658.64 | 0.8403 | 553.46 |
2 | 747.6 | 0.7062 | 527.96 |
3 | 510.48 | 0.5934 | 302.92 |
4 | 451.28 | 0.4987 | 225.05 |
Net Present Value | 9.39 |
Computation of IRR | ||||||||||
IRR is a rate whrere the NPV of the project is zero. Since project NPV is positive, The IRR will be higher than the discounting rate. The NPV while discouting with 20% rate is -18.97 while discounting at 19 % discount rate is 9.39. Therefore the IRR will be | ||||||||||
IRR= |
Ra
+ NPVa *(rb-ra) NPVa-NPVb |
(where a represents lower rate and b represents higher rate) | ||||||||
= |
0.19
+ 9.39 *(.20-.19) 9.39-(-18.97) |
|||||||||
= | .19+0.0033 | |||||||||
= | 0.1933 | |||||||||
= | 19.33% | |||||||||
Year | Cash Flow | F.V. Factor till the end of Project | Future Value |
[Inflow/(outflow] | [@10 %] | [Cash Flow*F.V. Facotr] | |
1 | 658.64 | 1.3310 | 876.65 |
2 | 747.6 | 1.2100 | 904.60 |
3 | 510.48 | 1.1000 | 561.53 |
4 | 451.28 | 1.0000 | 451.28 |
Future Value of Cash Inflows | 2794.06 | ||
Initial Investment | 1600.00 | ||
MIRR = | (FVCI/PVCO)1/n - 1 | ||
Where | |||
FVCI | =sum of future values of all net cash flows at the end of the project | ||
PVCO | = initial investment | ||
n | = is the number of periods | ||
MIRR= | (2794.06/1600)1/4 - 1 | ||
(1.746288)1/4 - 1 | |||
0.1496 | or Say 14.96% | ||
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