CMA Final · Strategic Financial Management · Digital Finance
A blockchain-based trade-finance platform will cost a bank Rs 8 crore now. It is expected to save Rs 3 crore at the end of each year for 4 years. The bank's cost of capital is 12%. The annuity factor for 4 years at 12% is 3.0373. What is the NPV, and should the bank proceed?
NPV is about Rs 1.11 crore and the bank should proceed. Savings of Rs 3 crore a year for four years discounted at 12% have a present value of Rs 9.11 crore, which exceeds the Rs 8 crore outlay, so the project adds value.
- ANPV = Rs 1.11 crore; proceedCorrect
- BNPV = Rs 1.11 crore; reject
- CNPV = Rs -1.11 crore; reject
- DNPV = Rs 4.00 crore; proceed
Explanation
PV of savings = 3 x 3.0373 = Rs 9.1119 crore. NPV = 9.1119 - 8 = Rs 1.1119 crore, about Rs 1.11 crore, which is positive so the bank should proceed. Rs 4 crore comes from undiscounted savings of 12 minus 8.
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