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CA Intermediate · Financial Management and Strategic Management · Investment Decisions

Bharat Auto Components plans to buy a machine for ₹10,00,000 and needs an additional working capital of ₹2,00,000 at the start. The project runs for 3 years and gives an after-tax cash inflow of ₹5,00,000 at the end of each year. At the end of year 3, the machine's salvage value is ₹1,00,000 and the whole working capital is released. The discount rate is 10% (annuity factor for 3 years 2.487; PV factor of year 3 is 0.751). What is the NPV of the project?

The NPV is ₹2,68,800. Present value of the annual inflows is ₹12,43,500 and of the year-3 salvage plus working capital release is ₹2,25,300, totalling ₹14,68,800. Subtracting the initial outlay of ₹12,00,000, which includes working capital, gives the NPV.

  1. A₹1,18,600
  2. B₹1,93,700
  3. C₹2,68,800Correct
  4. D₹3,18,600

Explanation

PV of annual inflows = 5,00,000 × 2.487 = 12,43,500. Year 3 terminal flows = 1,00,000 + 2,00,000 = 3,00,000 × 0.751 = 2,25,300. Total PV = 14,68,800. Initial outflow = 10,00,000 + 2,00,000 = 12,00,000. NPV = 2,68,800. Omitting the working capital recovery gives 1,18,600, while excluding working capital altogether gives 3,18,600.

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