Corporate Finance

neha.kapoor318
Posts: 9
Joined: Sat Jun 07, 2014 7:14 am

Corporate Finance

Postby neha.kapoor318 » Mon Aug 11, 2014 6:04 am

An Investment has an outlay of 100 and after tax cash flows of 40 annually for four years.A project enhancement increases the outlay by 15 and the annual after cash flows by 5. As a result , the vertical intercept of the NPV profile of the enhanced project shifts: The Answers for the questions are: A)Up and the horizontal intercept shifts left. B)Up and the horizontal intercept shifts right. C) Down and the horizontal intercept shifts left. Can u please expain me the this question and the outcome of this question?

edupristine
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Corporate Finance

Postby edupristine » Mon Aug 11, 2014 10:07 am

The Correct answer is A.
The NPV profile basically shows the NPV of the project at different levels of discount rate. If the discount rate of the project is zero, and if we simply sum the cash flows we would get the vertical intercept of the NPV profile. In the question above the vertical intercept would increase from 60 to 65. The horizontal intercept measures the IRR as this is the rate at which NPV is zero. This intercept would move to the left in the question above. This can be seen by putting in the cash flow in the question into the calculator. IRR declines from 21.86% to 20.68%.

neha.kapoor318
Posts: 9
Joined: Sat Jun 07, 2014 7:14 am

Postby neha.kapoor318 » Mon Aug 11, 2014 2:37 pm

As you mentioned that the vertical intercept would increase from 60 to 65 can u please explain how will you get these figures i mean the calculation done for this. In addition to this also i am able to get first calculation of IRR that is 21.86% whereas i am not able to get IRR 20.68% how did you get this figure can please explain the calculation ?

pankaj
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Corporate Finance

Postby pankaj » Thu Aug 14, 2014 11:02 am

My answer to your latest query related to above question gives you detailed explanation.


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