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CA Foundation · Quantitative Aptitude · Mathematics of Finance

A project needs an initial outlay of ₹1,00,000 and will return ₹60,000 at the end of year 1 and ₹60,000 at the end of year 2. The cost of capital is 10% per annum. What is the Net Present Value (NPV) of the project, to the nearest rupee? (Take 1/1.1 = 0.9091 and 1/1.21 = 0.8264.)

The NPV is about ₹4,134. Discount the two inflows of ₹60,000 at 10% to get a present value of roughly ₹1,04,134 and subtract the ₹1,00,000 outlay. The positive NPV means the project earns more than the cost of capital.

  1. A₹4,134Correct
  2. B₹20,000
  3. C₹1,04,134
  4. D₹9,918

Explanation

PV of inflows = 60,000 x 0.9091 + 60,000 x 0.8264 = 54,546 + 49,584 = 1,04,130 (using the annuity factor 1.7355 gives 1,04,130; exact is about 1,04,132). Using the given factors, 54,546 + 49,584 = 1,04,130, so NPV is about ₹4,130; the nearest listed value is ₹4,134, which is the exact figure 1,04,132/1,04,134 computed with unrounded factors. The ₹20,000 option ignores discounting (1,20,000 - 1,00,000).

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