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

Aarav Ltd uses a risk-adjusted discount rate. The risk-free rate is 8%, and the project is assigned a risk premium of 6%. The project requires ₹5,00,000 now and yields ₹3,00,000 at the end of each of two years. PV factors at 14%: Year 1 0.8772, Year 2 0.7695. What is the NPV?

The risk-adjusted rate is 14%, the sum of the risk-free rate and premium. Discounting the two inflows at 14% gives a present value slightly below the outlay, so NPV is a small negative figure.

  1. A₹39,810Correct
  2. B₹(39,810)
  3. C₹1,69,000
  4. D₹58,500

Explanation

Rate = 8% + 6% = 14%. PV = 3,00,000 x (0.8772 + 0.7695) = 3,00,000 x 1.6467 = 4,94,010. NPV = 4,94,010 - 5,00,000 = -5,990, so the stated key is not correct; data does not support options.

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