CA Intermediate · Financial Management and Strategic Management · Investment Decisions
Aarav Ltd. is evaluating a project with an initial outlay of ₹2,00,000 and a single cash inflow of ₹2,64,000 at the end of year 2. The cost of capital is 10% per annum. Ignoring taxes, the Net Present Value of the project (using the discount factor at 10% for year 2 as 0.826, rounded to the nearest rupee) is:
The NPV is ₹18,064 positive. The inflow of ₹2,64,000 discounted at 10% for two years using a factor of 0.826 has a present value of ₹2,18,064, and subtracting the ₹2,00,000 outlay leaves ₹18,064, so the project is acceptable.
- A₹18,064Correct
- B₹64,000
- C₹2,18,064
- D₹(18,064)
Explanation
PV of inflow = 2,64,000 × 0.826 = 2,18,064. NPV = 2,18,064 − 2,00,000 = ₹18,064. Option ₹2,18,064 is the present value of inflows, not NPV. ₹64,000 is the undiscounted net gain. The negative figure reverses the sign.
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