Chapter 4 Investment Efficiency
Chapter 4 Investment Efficiency
Chapter 4 Investment Efficiency
Part 4: Investment
Efficiency
i i
TR =
i =0
TC
i =0
• How long it will take for the investment to pay back the
initial cost?
• In project selection
- PP < target payback → accept
• In alternative-projects selection
Choose the shortest PP
Calculate the PP of the two machines using the above cash flows and
decide which new machine NEM should accept. Assume the target
payback period the company establishes is 5 years.
Slides by Upa Minh-FTU
ANSWER 3 (PP)
TR = TC
PQBEP = FC + VC = FC + vQBEP
FC
FC: fixed cost QBEP =
VC: variable cost
v: variable cost per unit P−v
Slides by Upa Minh-FTU
EXERCISE 1 (BEP)
Assume a company is deciding two options of
buying car for taxi business:
- Plan 1: Buy a new car with total investment
500mVND; v=6000VND/km;
Price=11000VND/km
- Plan 2: Buy a second-hand car with total
investment 240mVND; v=8000VND/km;
Price=11000VND/km
Calculate BEP of the two options and which Plan
that the company should accept
Slides by Upa Minh-FTU
ANSWER 1 (BEP)
FC 500,000,000
QBEP1 = P − v = 11000 − 6000 = 100,000 km
FC 240,000,000
Q = = = 80,000 km
− −
BEP 2
P v 11000 8000
FVn=PV(1+r)n
1
PV = FVn
(1 + r) n
FV9=PV (1+r1)2(1+r2)3(1+r3)4
2 3
FV9=100m (1+8%) (1+9%) (1+11%)4
= 100m(1+R) 9
n
1
NPV = CFi
i =0 (1 + r ) i
• Is project profitable?
• In project selection
- NPV>0 → accept
- NPV<0 → reject
• In alternative-projects selection
Choose the biggest NPV
Calculate the NPV of the two machines using the above cash flows
and decide which new machine NEM should accept; r=8%
Year 0 1 2 3 4
Machine C -100 90 90
Machine D -150 70 70 70 70
Calculate the NPV of the two machines using the above cash flows
and decide which new machine the company should accept; r=8%
NPV(C) = 60.5
NPV(D) = 81.8
• Is project profitable?
• In project selection
- PI>1 → accept
- PI<1 → reject
• In alternative-projects selection
Choose the biggest PI
Year 0 1 2 3 4
Machine C -100 90 90
Machine D -150 70 70 70 70
Calculate the PI of the two machines using the above cash flows and
decide which new machine the company should accept; r=8%
Year 0 1 2 3 4
Machine C -100 90 90
Machine D -150 70 70 70 70
Calculate the IRR of the two machines using the above cash flows
and decide which new machine the company should accept
r1: NPV>0
r2: NPV<0
r2-r1 <5% highly recommended
• Is project profitable?
• In project selection
- IRR>r → accept
- IRR<r → reject
• In alternative-projects selection
Choose the biggest IRR
t
1
CF0 - CFi /
(1 + r ) i
DPP = t + i =0
1
CFt +1 t +1
(1 + r )
Slides by Upa Minh-FTU
EXERCISE 1 (DPP)
Year 0 1 2 3 4 5
Machine A -5000 500 1000 1000 1500 2500
Calculate the DPP of the two machines using the above cash flows
and decide which new machine NEM should accept. Assume the
target payback period the company establishes is 5 years; r=10%
• How long it will take for the investment to pay back the
initial cost?
• In project selection
- DPP < target payback → accept
• In alternative-projects selection
Choose the shortest DPP
NPV=1.82
PI=1.01
IRR=11.43%
PP=5.14 years
DPP=5.95 years
Project B -10,000 2000 2000 2000 2000 2000 2000 2000 12000
Project C -11,000 2650 2650 2650 702650 2650 2650 2650 2650
Project A -1,000 3 3 1 1
Project B -10,000 1 1 2 3
Machine D -11,000 2 2 3 2
Year 0 1 2 3