Following data are given for a capital project: Annual interim cash inflows for first two years 1,00,000 Annual interim cash inflows for next two…

Answer (a) (i) Initial Investment Using IRR = 12%, the NPV is zero. So, the initial investment is equal to the present value of inflows at 12%. Year Cash Inflows (₹) PVF@12% Present Value (₹) 1 1,00,000 0.893 89,300 2 1,00,000 0.797 79,700 3 80,000 0.712 56,960 4 80,000 0.636 50,880 4 50,000 (salvage) 0.636 31,800 Total 3,08,640 Total Present Value = 3,08,640. So, Initial Investment = 3,08,640. (ii) Net Present Value (NPV) Year Cash Flows (₹) PVF@10% Present Value (₹) 0 (3,08,640) 1 (3,08,640) 1 1,00,000 0.909 90,900 2 1,00,000 0.826 82,600 3 80,000 0.751 60,080 4 80,000 0.683 54,640 4 50,000 (salvage) 0.683 34,150 Sum of PV of Cash Inflows 3,22,370 NPV (3,22,370-3,08,640) 13,730 (iii) Profitability Index (PI) PI = Sum of PV of Cash Inflows Initial Cash Outflow = 3,22,370 3,08,640 = 1.0445 (iv) Discounted Payback Period: Year Cash Flows (₹) PVF@10% PV (₹) Cumulative PV (₹) 1 1,00,000 0.909 90,900 90,900 2 1,00,000 0.826 82,600 1,73,500 3 80,000 0.751 60,080 2,33,580 4 1,30,000 (including salvage) 0.683 88,790 3,22,370 So, discounted payback = 3 years + 3,08,640 - 2,33,580 88,790 = 3.845 years OR 3.85 years OR 3 years 10 months 4 days approx. (v) Modified Internal Rate of Return (MIRR) Terminal value of cash inflows compounded to year 4 using 10%: Year Cash Inflows (₹) @ 10% reinvestment rate factor Present Value (₹) 1 1,00,000 1.331 1,33,100 2 1,00,000 1.210 1,21,000 3 80,000 1.100 88,000 4 80,000 1.000 80,000 4 50,000 (salvage) 1.000 50,000 Total 4,72,100 Total Terminal Value = 4,72,100 Now, 3,08,640/4,72,100 = 0.6537 or 0.654 If we see 0.654 in year of present value discount table, the rate which is coming is around 11.20%. So, MIRR is around 11.20%. Alternatively, solution can be presented in following way for MIRR: Total Return = 4,72,100/3,08,640 = 1.5296 (1+r) 4 = 1.5296 MIRR = (1.5296) (1/4) - 1 = 11.20% (Approx)