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Inestment Appraisal Synopsis 1 2
Inestment Appraisal Synopsis 1 2
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Payback period
Even cash flow
Initial Investment
PBP=
Annual Cash flow
1
Imrul Kayas, ACA
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100,000
PBP= =2.22∨2 years3 months (.22∗12=2.64∨3)
45,000
Workings:
Period Cash flow Cum. Cash flow
0 (1,50,000)
1 35,000 35,000
2 40,000 75,000
3 45,000 120,000
4 50,000 170,000
5 55,000 225,000
150,000−120,000
PBP=3+ × 12
50,000
30 , 000
PBP=3+ ×12 = 3 years 7 Months
50,000
Present value
PV of lump sum amount
FV
PV = ( 1+i )
n
0 1 2 3
It is assumed that discount rate is 10%.
40,000 45,000 50,000
NPV ={−100000+ + +
1.10 1.1 0
2
1.10
3
2
Imrul Kayas, ACA
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= 11119.45
PV of annuity in arrear
1
1− n
(1+i)
PV =FV ×
i
Example: : (1,00,000) 45,000 45,000 45,000 Discount rate is 10%
0 1 2 3
1
1−
(1+.10 )3
NPV= -1,00,000+ 45,000× .10
= -1,00,000+45,000×2.486= 11,870
PV of annuity is due
1
1−
(1+i)n
PV =FV × +1
i
Example: : 0 1 2
1
1−
(1+.10 )2
NPV= -1,00,000+ 40,000× .10 +1
= -1,00,000 + 40,000×2.735= 9400
PV of annuity is delay
1
1−
(1+i)n
PV =FV ×
i
n
(1+i)
0 1 2 3 4 5 6 7
3
Imrul Kayas, ACA
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1
1−
(1+.10 )3
. 10
. 1 . 10 4
4
Imrul Kayas, ACA
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5
Imrul Kayas, ACA
Mobile: 01737231658
Example: : (1,50,000) 40,000 40,000 40,000 40,000 40,000 Discount rate is 10%
0 1 2 3 4 5
PV of annuity = 40,000 ×
= 151,631
=10.24
Advantages of MIRR
MIRR overcomes 2 major drawbacks of IRR including the elimination of multiple IRRs in case
of investments with unusual timing of cash flows and secondly the re-investment
problem discussed earlier.Helps in the measurement of sensitivity of an investment towards
variation in the cost of capital.
Limitations of MIRR
As with IRR, MIRR may lead to sub-optimal decision making when multiple investment options
are being considered. As MIRR does not quantify the impact of different investments on the
wealth of investors in absolute terms, NPV provides a more effective theoretical basis for
selecting investments that are mutually exclusive (i.e. where the selection of one investment
results in the abandonment of another investment, e.g. due to shortage of funds).
MIRR can be hard to understand for people belonging from a non-financial background. The
theoretical basis for MIRR is also disputed among academics.
Profitability Index
PV of net receipt
PI =
Initial Investment
151,000
PI = =1.0108
150,000
If PV > 1, Project is accepted
If PV < 1, Project is rejected
7
Imrul Kayas, ACA
Mobile: 01737231658