IAI Actuarial Core Principles · Actuarial Mathematics for Modelling · Project appraisal
A project requires an outlay of Rs 1,000,000 now and returns Rs 1,200,000 exactly two years from now. The firm borrows at an effective annual rate of 8%. What is the net present value of the project at 8% per annum?
The NPV is Rs 28,806.58. The Rs 1,200,000 received after two years is discounted at 8% for two years, giving Rs 1,028,806.58, and the Rs 1,000,000 outlay is then subtracted. The positive result means the project beats the cost of borrowing.
- ARs 28,806.58Correct
- BRs 111,111.11
- CRs 200,000.00
- D-Rs 47,401.30
- Rs 399,680.00
Explanation
NPV = 1,200,000 / 1.08^2 - 1,000,000 = 1,200,000 / 1.1664 - 1,000,000 = 1,028,806.58 - 1,000,000 = 28,806.58. Rs 111,111.11 discounts for only one year. Rs 200,000 ignores discounting. Rs 399,680 accumulates rather than discounts.
Did you get it right without looking?
One question tells you little. A timed set on Project appraisal shows your real accuracy, how long you take and where you lose marks.
More Project appraisal questions
- A machine costs Rs 500,000. It generates net cash flow of Rs 80,000 at the end of each year for 10 years and is then sold for Rs 100,000 at …
- A project has cashflows of -₹100 at time 0, +₹230 at time 1 and -₹132 at time 2 (₹ lakh). Which statement about its internal rate of return …
- A project requires an initial outlay of Rs 10,00,000 and is expected to return Rs 3,00,000 each year, received evenly through the year, for …
- A project requires an initial outlay of Rs 10,00,000 and returns Rs 3,00,000, Rs 4,00,000, Rs 5,00,000 and Rs 6,00,000 at the end of years 1…
- Meera invests ₹1,00,000 today in a project that returns a single payment of ₹1,21,000 exactly two years from now, with no other cashflows. W…
- An investment requires Rs 10,000 now and pays Rs 5,500 at the end of year 1 and Rs 6,050 at the end of year 2. What is the internal rate of …