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CMA Final · Strategic Financial Management · Evaluation of Risky Proposals for Investment Decisions

A project of Kaveri Industries has an initial outlay of Rs 2,00,000 and a single inflow after one year. The inflow is Rs 1,00,000 with probability 0.3, Rs 3,00,000 with probability 0.5 and Rs 4,00,000 with probability 0.2. The discount rate is 10%. What is the expected NPV?

Expected NPV equals the probability-weighted inflow discounted at the given rate, minus the outlay. The expected inflow is 2,60,000, its present value at 10% is about 2,36,364, and subtracting the 2,00,000 outlay leaves an expected NPV of about 36,364.

  1. ARs 1,36,364Correct
  2. BRs 1,50,000
  3. CRs 1,00,000
  4. DRs 1,18,182

Explanation

Expected inflow = 0.3x1,00,000 + 0.5x3,00,000 + 0.2x4,00,000 = 30,000 + 1,50,000 + 80,000 = 2,60,000. PV = 2,60,000/1.10 = 2,36,364. Expected NPV = 2,36,364 - 2,00,000 = 36,364. Therefore none matches exactly; the closest computed value is 36,364.

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