NPV Method
NPV of Project X
Year cash inflow PV of Rs. 1 PV of cash inflow
10%
1 10000 0.909 9090
2 20000 0.826 16520
3 30000 0.751 22530
4 45000 0.683 30735
5 60000 0.621 37260
Total cash inflow 116135
– PV of initial investment 70000
46135
NPV = Rs. 46135
NPV of Project Y
Year cash inflow PV of of Rs.1 PV of cash inflow
At 10%
1 50000 0.909 45450
2 40000 0.826 33040
3 20000 0.751 15020
4 10000 0.683 6830
5 10000 0.621 6210
Total cash inflow 106550
Less PV of initial investment 70000
NPV 36550
NPV = Rs. 36550
NPV is greater for project X . So we select project X.
Profitability index for project X
= PV of cash inflow
PV of cash outflow
= 116135 = 1.66
70000
For project Y
= 106550 = 1.52
70000
PI is greater for project X. So we select project X.
IRR method
For project X
Year cash inflow PV factor discounted PV at 30% discounted
At 25% cash inflow cash inflow
1 10000 0.8 8000 0.769 7690
2 20000 0.640 12800 0.592 11840
3 30000 0.512 15360 0.455 13650
4 45000 0.410 18450 0.350 15750
5 60000 0.328 19680 0.269 16140
74290 65070
IRR for project X
25 + 74290 – 70000 x 5
74290 – 65070
= 27.32 %
For Project Y
Year cash inflow PV at 35% discounted PV at 40% discounted
Cash flow cash flow
- 50000 0.769 38450 0.714 35700
2 40000 0.592 23680 0.510 20400
3 20000 0.455 9100 0.364 7280
4 10000 0.350 3500 0.260 2600
5 10000 0.269 2690 0.186 1860
72370 67840
IRR = 35 + 72370 – 70000 x 5 = 37.61%
72370 – 67840
