Investment Analysis Problem: IRR method Initial Investment Rs.60,000 Life of the Asset 4 Years Estimated Net Annual Cash flows: Year Cash Inflow 115,000.

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Presentation transcript:

Investment Analysis Problem: IRR method Initial Investment Rs.60,000 Life of the Asset 4 Years Estimated Net Annual Cash flows: Year Cash Inflow 115, , , ,000 Calculate Internal Rate of Return

Investment Analysis Year Cash P.V.F P.V P.V.F P.V P.V.F P.V P.V.F P.V Inflow 10% 12% 14% 15% 115, , , , , , , , , , , , , , , , , , , , ,345 63,350 60,595 59,285 At Internal Rate of Return, total present value of cash inflows is equal to initial investement. Initial investment is Rs.60,000. Hence internal Rate of Return must be in between 14% and !5% ( i.e between Rs.60,595 and 59,285) The exact Internal Rate of Return is calculated as follows:

Investment Analysis At 14% total present value = 60,595 At 15% total present value = 59, Difference 1,310 For a difference of 1,310, difference of rate = 1% ( i.e 15% -14%) For a difference of 595, difference in rate ? ( 60,595 – 60,000 = 595)

Investment Analysis 595 /1310 X1% = 0.45% Hence the IRR is 14% +0.45% = 14.45%

Ratio Analysis Liabilities Assets 5,000 E.S. of Land & Building 6,00,000 Rs.100 each 5,00,000 Plant & Machinery 5,00,000 2,000 8% Pref.S.of Rs.100 each 2,00,000 Stock 2,40,000 4,000 9% Deb. Of Rs.100 each 4,00,000 Debtors 2,00,000 Reserves 3,00,000 Cash and Bank 55,000 Creditors 1,50,000 Pre-paid expenses 5,000 Bank Overdraft 50, ,00,000 16,00,000

Ratio Analysis Find out: 1.Current Ratio 2.Quick Ratio or Liquid Ratio 3.Proprietors’ Ratio 4.Debt – Equity Ratio

Ratio Analysis Current Assets 5,00,000 1.Current Ratio = = = 2.5 : 1 Current Liabilities 2,00,000 Liquid Assets 2,55, Liquid Ratio = = = 1.7 : 1 Liquid Liabilities 1,50,000 Proprietors funds 10,00, Proprietary Ratio = = = : 1 Total tangible assets 16,00,000