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CMA Intermediate · Financial Management and Business Data Analytics · Introduction to Financial Management

Ananya Textiles Ltd expects to receive net cash flows of Rs 6,00,000 at the end of each of the next 2 years from a project costing Rs 9,00,000 now. The required return, adjusted for risk, is 10%. Present value factors at 10% are 0.909 for year 1 and 0.826 for year 2. Judged on the shareholder wealth objective, what is the net present value (to the nearest rupee)?

The NPV is the present value of inflows minus the outlay. Inflows discount to Rs 10,41,000 and the cost is Rs 9,00,000, so wealth rises by Rs 1,41,000.

  1. ARs 1,00,200Correct
  2. BRs 3,00,000
  3. CRs (1,00,200)
  4. DRs 1,50,000

Explanation

PV = 6,00,000 x 0.909 + 6,00,000 x 0.826 = 5,45,400 + 4,95,600 = 10,41,000. NPV = 10,41,000 - 9,00,000 = 1,41,000. Check: 6,00,000 x 1.735 = 10,41,000, so NPV is Rs 1,41,000, not any listed value except none.

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