IAI Actuarial Core Principles · Actuarial Mathematics for Modelling · Project appraisal
A project pays Rs 33,000 at the end of year 1 and Rs 48,400 at the end of year 2. At an effective annual rate of 10%, what initial outlay would give the project a net present value of exactly Rs 5,000?
The outlay must be Rs 65,000. The receipts have a present value of 70,000 at 10%, made up of 30,000 and 40,000. An NPV of 5,000 means the outlay is 5,000 below this present value, so 65,000.
- ARs 65,000Correct
- BRs 75,000
- CRs 70,000
- DRs 81,400
- Rs 60,000
Explanation
PV of receipts = 33,000/1.1 + 48,400/1.21 = 30,000 + 40,000 = 70,000. For NPV = 5,000 the outlay must be 70,000 − 5,000 = 65,000. An outlay of 70,000 gives an NPV of zero, and 75,000 gives −5,000.
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