IAI Actuarial Core Principles · Actuarial Mathematics for Modelling · Project appraisal
A project costs Rs 100,000 today and returns Rs 40,000 at the end of each of the next 3 years. Using a discount rate of 10% per annum effective, what is the net present value of the project?
The NPV is -Rs 525.92. The inflows of Rs 40,000 for three years at 10% have a present value of Rs 99,474.08, which is less than the Rs 100,000 outlay, so the project has a small negative net present value.
- A-Rs 525.92Correct
- BRs 525.92
- CRs 20,000.00
- DRs 99,474.08
- -Rs 4,000.00
Explanation
The PV of inflows is 40,000 x a(3) at 10% = 40,000 x 2.486852 = 99,474.08. NPV = 99,474.08 - 100,000 = -525.92. Rs 20,000 is wrong because it ignores discounting and subtracts the cost from the undiscounted inflows. Rs 525.92 has the wrong sign.
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