Technique of Capital Budgeting : Discounted pay back period

May 12th, 2015
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• Your Company is considering two Project, M&N , Each of which requires an initial outlay of Rs. 50 Million. The Expected cash inflows from these projects are? Que: What is the payback period for M and N?

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FM PresentationFinance ManagementTechnique of Capital Budgeting Your Company is considering two Project, M&N , Each of which requires an initial outlay of Rs. 50 Million. The Expected cash inflows from these projects are :YearProject MProject N11138219223321843710Que: What is the payback period for M and N?Ans (A): Project MThe pay back period of the project lies between 2 and 3 years. Interpolating inthis range we get an approximate pay back period of 2.63 years Project NThe pay back period lies between 1 and 2 years. Interpolating in this range weget an approximate pay back period of 1.55 years.Que: What is the Discount Payback period for M and N if the cost of capital is 12%? Ans (B):Project MCost of capital = 12% p.aPV of cash flows up to the end of year 1 =9.82PV of cash flows up to the end of year 2 = 24.97PV of cash flows up to the end of year 3 = 47.75PV of cash flows up to the end of year 4 = 71.26Discounted pay back period (DPB) lies between 3 and 4 years. Interpolating in this range we get an approximate DPB of 3.1 years.Project NCost of capital= 12% per annumPV of cash flows up to the end of year 1= 33.93PV of cash flows up to the end of year 2= 51.47DPB lies between 1 and 2 years. Interpolating in this range we get an approximate DPB of 1.92 years.Que: If the two projects are independent and costof capital is 12%, Which project should the firminvest in? Ans (C)Pr

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