Case Study on NPV, IRR and BCR calculation

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Case Study on NPV, IRR and BCR calculation

Facilitator-

Dr. Engr. Md. Abdur Rashid

Director (Research & Publication)

NAPD

 Google Scholar         ORCID

Case Study 1

Mr. Raihan wants to invest 1000000 takas. Mr. Raihan is going to purchase 3 years’ savings certificate. Study shows that yearly profit of Al Arafa Bank is 10.00%. On the other hand, savings certificate interest rate is 9%. Calculate NPV, IRR and BCR. Give investment decision on 3 years’ savings certificate.

Calculate-

1.    Yearly cash flow considering year 3 get return of original investment taka 10,00000

2.    NPV

3.    IRR

4.    BCR

5.    Give investment decision

C Calculation:

Yearly Cash Flow

  • Initial Investment (Year 0): –1,000,000 taka
  • Yearly Interest (9% of 1,000,000): 90,000 takas per year
  • Return of Principal at Year 3: 1,000,000 taka

So the cash flow stream is:

  • Year 0: –1,000,000
  • Year 1: +90,000
  • Year 2: +90,000
  • Year 3: +1,090,000 (principal+interest)

 Answer-

•         If NPV > 0 at a given discount rate, the project is profitable at that rate.

•         If NPV < 0, the project is not profitable at that rate.

•         IRR is the “break-even” point where the project neither gains nor loses value                 in present terms.

Now Calculation is done using NPV,IRR, and BCR formula using above data-

 N  Opportunity cost (10%

N   PV= –25,207.19

3.     IRR= 9%

4.     BCR= 0.975

Project Investment Decision

  • NPV is negative (–25,207.19 taka) → destroys value compared to the alternative.
  • IRR ≈ 9% → lower than opportunity cost (10%).
  • BCR < 1 (0.975) → benefits are less than costs.
  • Opportunity cost (10%) > Savings Certificate return (9%) → better to invest in Al Arafa Bank.

Final Recommendation:

 Mr. Raihan should reject to invest at the 3-year savings certificate scheme and invest in Al Arafa Bank instead, since the bank’s profit rate (10%) is higher and creates positive value.

 

  


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