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CA Intermediate · Financial Management and Strategic Management · Investment Decisions

Anand Foods plans a project needing ₹10,00,000 in machinery plus ₹2,00,000 of working capital at the start. The project gives annual cash inflows of ₹4,50,000 for 3 years, and the working capital is fully recovered at the end of year 3. The cost of capital is 10%; the annuity factor for 3 years is 2.487 and the year-3 PV factor is 0.751. What is the NPV?

The NPV is ₹69,350. Present value of inflows is ₹11,19,150 and of the working capital recovery is ₹1,50,200, totalling ₹12,69,350. Subtracting the total initial outlay of ₹12,00,000, which includes working capital, gives ₹69,350.

  1. A₹1,19,150
  2. B₹69,350Correct
  3. C₹2,69,350
  4. D-₹80,850

Explanation

PV of inflows = 4,50,000 × 2.487 = 11,19,150. PV of working capital recovery = 2,00,000 × 0.751 = 1,50,200. Total PV = 12,69,350. Total outflow = 10,00,000 + 2,00,000 = 12,00,000. NPV = 69,350. Omitting the working capital outflow gives 2,69,350, which is wrong.

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