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CS Executive · Corporate Accounting and Financial Management · Capital Budgeting

Ananya Textiles is evaluating a project with an initial outlay of Rs 2,00,000 that gives a single cash inflow of Rs 2,42,000 at the end of year 2. The cost of capital is 10% per annum. What is the Net Present Value (NPV) of the project?

The NPV is zero. The inflow of Rs 2,42,000 received after two years, discounted at 10%, has a present value of Rs 2,00,000, which equals the outlay. So the project exactly earns the cost of capital, and its IRR is 10%.

  1. ARs 0Correct
  2. BRs 42,000
  3. CRs 22,000
  4. DRs 2,00,000

Explanation

PV of inflow = 2,42,000 / (1.10)^2 = 2,42,000 / 1.21 = Rs 2,00,000. NPV = 2,00,000 - 2,00,000 = 0. Rs 42,000 is the undiscounted surplus, which ignores time value of money. Check: 2,00,000 x 1.21 = 2,42,000.

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