1. Project Management Aspects of Project Evaluation Lecture 5 Resource Person: M. Adeel Anjum

2. Payback Period (PBP) “Number of Years Required for Project” - Repay “Initial Fixed Investment”. Assumption: a) CASH INFLOWS- Persist Long Enough to payback. b) Ignores any CASH INFLOW beyond PBP. Less Risk for Firm Faster Investment Recovered Serves as inadequate Proxy for Risk

3. Pay Back Period Formula a+ b-c / d Where a = The year in which investment is near to recover. b = Initial Investment c = Cumulative Cash flow of the year in which investment is near to recover d =Cash flow of the year in which investment is fully recovered

4. PBP from the following Data, Calculate PBP YearsCash Flow 0Rs. 100,000 1Rs. 34432 2Rs. 39530 3Rs. 39358 4Rs. 32219

5. PBP Solution YearCash FlowCumulative Cash Flow 0Rs. 100,000 -------- 1Rs. 34432 34,432 2Rs. 39530 73,962 3Rs. 39358 113,321 4Rs. 32219 145,540

6. Solution a = 2 b = 100,000 c = 73,962 d = 39359 Formula PBP=a+ b-c / d = 2 + 100,000 – 73,962 / 39359 = 2 + 26038 / 39359 = 2 + 0.6615 = 2.6615 PBP 2.6615 Years

7. Calculate PBP YearsCash Flow 0Rs. 120,000 1Rs. 40,459 2Rs. 45,550 3Rs. 47,370 4Rs. 39,530 5Rs. 42,147

8. Net Present Value Net Present Value of an investment proposal is the proposal’s net cash flow less than the initial cash out flow (ICO). Formula NPV = [ CF 1 / (1+K) 1 + CF 2 / (1+K) 2 + ……. CF n / (1+K) n ] – ICO Where CF = Cash flow of the year K = Rate of Return (Any Given Value or Percentage) ICO = Initial Cash out flow

9. NPV from the following Data, Calculate NPV with 12 % rate of return YearsCash Flow 0Rs. 100,000 1Rs. 34432 2Rs. 39530 3Rs. 39358 4Rs. 32219

10. Internal Rate of Return (IRR) Internal Rate of Return is the discount rate which equates the present value of expected net cash flow with ICO. ICO = [ CF 1 / (1+RR) 1 + CF 2 / (1+RR) 2 + ……. CF n / (1+RR) n ] Where CF = Cash flow of the year RR / PVIF = Rate of Return (Any Given Value or Percentage) PVIF = Present Value Interest Factor [ 1 / (1+RR) n ] ICO = Initial Cash out flow

11. IRR From the following Data, Calculate IRR with 15 % rate of return YearsCash Flow 0Rs. 100,000 1Rs. 34432 2Rs. 39530 3Rs. 39358 4Rs. 32219

12. IRR From the following Data, Calculate IRR with 20 % rate of return YearsCash Flow 0Rs. 100,000 1Rs. 34432 2Rs. 39530 3Rs. 39358 4Rs. 32219

13. Find Out IRR YearsCash Flow 0Rs. 120,000 1Rs. 40,459 2Rs. 45,550 3Rs. 47,370 4Rs. 39,530 5Rs. 42,147

14. Interpolation Of IRR It estimates an unknown number that lies somewhere between the two numbers.

15. Profitability Index (PI) Profitability Index of the project is the ratio of Present Value of the future’s net cash flow to the initial cash out flow. Formula PI = [ CF 1 / (1+K) 1 + CF 2 / (1+K) 2 + ……. CF n / (1+K) n ] / ICO