IAI Actuarial Core Principles · Actuarial Mathematics for Modelling · Project appraisal
A project costs Rs 100,000 now and returns Rs 60,000 at the end of year 1 and Rs 60,000 at the end of year 2. Using an effective annual interest rate of 10%, what is the net present value of the project?
The NPV is Rs 4,132.23. The receipts of 60,000 in each of years 1 and 2 have a present value of 104,132.23 at 10%. Subtracting the initial outlay of 100,000 leaves a positive NPV, so the project is worthwhile at that rate.
- ARs 4,132.23Correct
- BRs 104,132.23
- CRs 20,000.00
- DRs 9,090.91
- -Rs 4,132.23
Explanation
PV of receipts = 60,000(1/1.1 + 1/1.21) = 60,000 × 1.735537 = 104,132.23. NPV = 104,132.23 − 100,000 = 4,132.23. Rs 104,132.23 forgets to deduct the outlay, and Rs 20,000 ignores discounting.
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