Accounting and Decision Making Techniques

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Accounting and Decision Making Techniques
Assignment MFP/MBA November 2012 –March 2013 Course Lecturer: S.A. Palan

ONUR CAN ASLAN B0316KGKG1112

2013

Table of Content ABSTRACT 3 INTRODUCTION 4 Importance of Investment Appraisal for Business Entities 5 Calculations of NPV, IRR and Payback Period 5 Selection of Projects 8 Changes in the NPV with cost of capital 8 Changes in the IRR with cost of capital 9 Difference of sensitivity between Long-term and Short term NPV 9 NPV versus IRR 9 Conclusion 10 References 11

ABSTRACT

This paper covers the implementation of three investment appraisal methods. Initially, importance of investment appraisal has been analyzed. Secondly, calculations have been done for
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-1 = 25307,3096
Year 2 =35000* ( 1+0.1064)-2= 28591,94568
Year 3 46000*(1+0.1064)-3 = 33964,19537
Year 4 62000*(1+0.1064)-4= 41375,7771
Year 5 78000* (1+0.1064)-5 = 47047,19844
+
Total present Value = 176286,4262
Net present value = 176286,4262 -165000 = 11286,42619

Net present Value calculations for Project Y
Total present value = 51000*[( 1-(1+0,1064)-5) / 0,1064 ] =51000*3,7296= 190210,2467
Net present value =190210, 2467-165000 = 25210,24674

IRR calculations for Project X
At %15 cost of capital NPV
Year 1 Present value = 28000* 1/( 1+0.15)1 =24347.82609
Year 2 present value = 35000* 1/ ( 1+0.15)2 =26465,02836
Year 3 present value = 46000* 1/ ( 1+0.15)3 =30245,74669
Year 4 present value = 62000*1/ ( 1+0.15)4=35448,70123
Year 5 present value = 78000*1/ ( 1+0.15)5= 38779,78535
+
Total present value = £155287,0877
Net present value=155287,0877-165000 = - 9712,91

At %12 cost of capital NPV
Year 1 Present value = 28000* 1/( 1+0.12)1 = 25000
Year 2 present value = 35000* 1/ ( 1+0.12)2 = 27901,78571
Year 3 present value = 46000* 1/ ( 1+0.12)3 = 32741,8914
Year 4 present value = 62000*1/ ( 1+0.12)4= 39402,12086
Year 5 present value = 78000*1/ ( 1+0.12)5= 44259,29475
+
Total present value = 169305, 0927
Net present value=169305, 0927-165000 = 4305,0927
IRR= LDR + [[NLDR / (NLDR –NHDR) ]*(HDR-LDR)]
LDR = Lower discount rate, HDR = Higher discount
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