1. A project is having following cash flow stream.

year Cash flow

0 (3.50,000)
1 1,25,000
2 1,00,000
3 75,000
4 60,000
5 50,000

The cost of capital is 8%. Calculate Payback period and NPV

2. A project involves following cash flows with varying discount rates.

YEAR Discount rate CASH FLOWS

0 (50,000)
1 10% 10,000
2 12% 15,000
3 18% 12,000
4 20% 10,000
5 24% 8,000

Calculate the NPV

3. Consider a project which is generating following cash flows that has a cost of capital of 22%.

Initial Investment Rs.2,00,000

Benefits:
Year 1 1,50,000
Year 2 1,00,000
Year 3 50,000
Year 4 25,000

Calculate NPV and Profitability index

4. Consider the following cash flows of a Project being evaluated by XYZ Limited and cost of capital
is 5%. Calculate NPV, Profitability index and IRR

YEAR Cash flows

0 (2,00,000)
1 1,00,000
2 75,000
3 50,000
4 40,000
5. A company has to select any one of the two projects

Project A Project B
Cost 22000 20000
Cash Inflows:
Year 1 12,000 2,000
Year 2 4,000 2,000
Year 3 2,000 4,000
Year 4 10,000 20,000
Using the Internal Rate of Return method, suggest which is Preferable.

6. From the following information calculate (a). Accounting Rate of Return and (b). Net Present
Value at 10% discount rate.

Initial Investment Rs.1,00,000

Estimated Life 5 Years
Scrap Value 10,000
Profit After Tax (PAT)
End of year 1 Rs.6,000
2 Rs.14,000
3 Rs.24,000
4 Rs.16,000
5 Nil

7. From the following data compute NPV of the two projects using Sensitivity analysis

Particulars Project X Project Y

Initial Cash outlays (t = 0) 40000 40000
Cash inflow estimates (t = 1 – 15)
Worst 6000 4000
Most Likely 8000 8000
Best 10000 16000
Required rate of return 0.10 0.10
Economic Life 15 15
Present Value Interest Factor Annuity (PVIFA) of Rs.1 for 15 years at 10%discount is 7.606.

8. The following information is available regarding the expected cash flows generated and their
probability for Company X. The investment for the project is Rs.15,000 assuming 10% as
discount rate, find out the present value of the expected monetary values(EMV) and NPV.

YEAR 1 Year 2 Year 3

Cash flows Probability Cash flows Probability Cash flows Probability
 3000 0.25 3000 0.50 3000 0.25
6000 0.50 6000 0.25 6000 0.25
8000 0.25 8000 0.25 8000 0.50

9. From the following table calculate Standard deviation for Project X and Project Y based on
present data.

Project X Project Y
CF Probability CF Probability
5636 0.25 (40000) 0.25
20848 0.50 20848 0.50
36060 0.25 81696 0.25

CF X CF bar 20848 (CF – CFbar) (CF – CFbar) 2 Pi (CF – CFbar)2Pi

Y CF bar 20848
SDX = SQRT (Ƹ(CF – CFbar)2Pi) = 10,756 SDY = 43026 CV=SDX/CFBar
10. From the following data calculate RADFNPV

CASH OUTLAYS (100000)

CFAT Year 1 50000
Year 2 60000
Year 3 40000

Risk free rate of return 8%

Risk adjusted rate of return for the current project is 28% (try NPV at 28%)
11. From the following information calculate NPV. The risk less rate of return is 6%

Year CFAT CE Factors

1 50000 0.90
2 60000 0.70
3 40000 0.60
12. A Project involves initial cost of 20,000 (Cost at t=0). It is expected to generate net cash flows
during the first 3 years with the probabilities as shown. Risk free rate of return is 10%.

Year 1 Year 2 Year 3

Probability Net Cash flow Probability Net Cash flow Probability Net Cash flow
0.10 6000 0.10 4000 0.10 2000
0.25 8000 0.25 6000 0.25 4000
0.30 10000 0.30 8000 0.30 6000
0.25 12000 0.25 10000 0.25 8000
0.10 14000 0,10 12000 0.10 10000

Ans: NPV = 204, SD 2280 FOR 3 PERIODS, FINAL SD 3283

 σ = SQRT (σ12 /(1.10)2 + σ22/(1.10)4 + σ32/(1.10)6)
σ 1= SQRT(P1(CF1 – CF )2 + P2 (CF2 – CF )2 + ...........(CFn – CF )
Where CF1 =6000, CF5=14000
CF BAR = 6000+8000+10000+12000+14000/5 or Ƹ NCF * Prob
= 10000
Calculate Expected value or CF Bar
EV =Ƹ NCF * Prob
COST OF CAPITAL
Computation of Cost of Capital
(A). Computation of Specific source of Finance
Cost of Debt
1. Cost of Perpetual / Irredeemable Debt (Before tax)
Kdb =I/P or I/NP
After tax
Kda = I/NP (1-t)
2. Cost of Redeemable Debt (Before tax)
Kdb = I + 1/n(RV – NP)/1/2(RV+NP)
Kda = I (1-t) + 1/n(RV – NP)/1/2(RV+NP)

1. A company issues 10% Debentures tor Rs. 2,00,000 Rate of tax is 55%. Calculate the cost of debt
(after tax) if the debentures are issued (i) at par (ii) at a discount of 10% and (iii) at a premium of
10%.(Ans 4.5%, 5%, 4.1%)
2. A company raises Rs 90,000 by the issue of 1,000 10% Debentures of Rs. 100 each at a discount
of 10%, repayable at par after 10 years. If the rate of company’s tax is 50, what is the cost of
debt capital to the firm?(Ans. 5.5%)
3. A company issues 10,000, 10% Debentures of Rs.10 each and realizes Rs.95,000 after allowing
5% commission to brokers. The debentures are redeemed after 10 years. Calculate the effective
cost of debt before tax (Ans:10.77%)
4. A company issues 10 per cent irredeemable preference shares. The face value per share is Rs.
100, but the issue price is Rs. 95. What is the cost of a preference share? What is the cost if the
issue price is Rs. 105?( Ans 10.53%, 9.52%)
5.
1. The Alpha formal company making for a stock in the first quarter of the year is assisted
by its Bankers with overdraft accommodation. The following are the relevant Budget
figures:

Months Sales Purchases Wages

November 1,20,000 83,000 9,800
December 1,28,000 96,000 10,000
January 72,000 1,62,000 8,000
February 1,16,000 1,64,000 4,000
March 84,000 1,79,000 10,400

Budgeted cash at Bank, 1st Jan, 2017 was Rs.17,200. On an average, one half of sales are
paid on due date while the other half is paid during the next month. Creditors are paid
during the month following the month of supply.

You are required to prepare a cash budget for the quarter, 1 st January to 31st March,
2017 showing the budgeted amount of bank facilities required at each month.

2. A Company expects to have Rs. 37,500 cash in hand on 1st April, and requires you to prepare an
estimate of cash position during the three months. April, May and June. The following
information is supplied to you:

Other Information: (i) Period of credit allowed suppliers 2 months. (ii) 20% of sales for cash and
period of credit allowed to customers for credit is one month. (iii) Delay in payment of all
expenses:1 month. (iv) Income tax of Rs. 57,500 is due to be paid on June 15th. (v) The company
is to pay dividend to shareholders and bonus to the workers of Rs. 15,000 and Rs. 22,500
respectively in the month of April. (vi) A plant has been ordered to be received and paid in May.
It will cost Rs.1, 20,000