The condition lying above is that the annual cash flows are equal. This is so because the calculation of Σ PV factor at IRR above have a special formula i.e. = Outflows
Annual Inflows
When life is infinite the IRR = (Annual inflow / PV of outflows)
IRR = 0, when life of project = Σ PV factor at IRR.
Project IRR is the IRR calculated taking the cash flows as for the project as a whole.
Equity IRR is the IRR calculated taking the cash flows as for the equity only (Equity cash flows = Project cash flows - Principal & Interest payment on other finances).
IRR for long term funds is the IRR calculated as for the long term funds (Long term fund cash flows = Project cash flows - Principal & Interest payment on short term finances).
Modified IRR is the IRR based on the assumption that the internal cash flows are re-invested at cost of capital whereas the simple IRR has an assumption that the internal cash flows are re-invested at IRR.
The basic principle of sensitivity analysis is that we, hereby with this
principle, have to think negative about the project’s NPV. For this we may
be having two conditions. These are:
1. Given conditions – The question may provide the elements governing
NPV, to make it (NPV) zero.
2. No specific condition – In this particular case we have o make NPV at
zero by sensitivising Cash Inflows, Cash Outflows, Life & Discount Rate.
Cash Inflows – Make it equal to Cash Outflows.
Cash Outflows – Make it equal to Cash Inflows.
Life – Use the formula of discounted payback period by taking inflows
as equal to outflows.
Discount Rate – Use IRRs conditional formula to arrive at NPV at zero.
Finally we have to see what is the proportion in which the element is
influencing the NPV to make it at zero.
8.
Standard deviation S 1 denotes standard deviation of year 1 Overall = √ ( S 1 ) 2 + ( S 2 ) 2 (1+K e ) 2 [(1+K e ) 2 ] 2 Independent cash flows Overall = ( S 1 ) + ( S 2 ) (1+K e ) (1+K e ) 2 Perfectly correlated cash flows Normal conditions = √ ( S 1 W 1 ) 2 + ( S 2 W 2 ) 2 + 2 ( S 1 W 1 S 2 W 2 R 12 ) S 1 denotes standard deviation of one asset. W 1 denotes weight of that asset. R 12 denotes correlation between those two assets S = √ Σ (Expected NPV- Actual NPV) 2 *probability More than one Asset Single Asset
If the cash flows are inflation adjusted, we use money rate for discounting the flows.
Inflation adjusted cash flows = (Normal cash flows)(1+Inflation rate) for next year. The normal cash flows denotes the cash flows in real term i.e. at period zero.
When the organisation, don't have sufficient funds to select different projects, it use the process of PI i.e. project having high PI is selected.
When there are outflows in multiple period of time the outflows except for the initial outflows are excluded.
PI = PV of inflows
Initial outflows
Firstly find NPV of all the projects leaded by the step to find minimum number of projects with maximum amount arrange projects in the deceasing order of NPV & draw a table to finally conclude the result.
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