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CMA Final · Strategic Financial Management · Investment Decisions, Project Planning and Control

Bharat Textiles is appraising a project requiring a machine costing Rs 10,00,000 and an additional working capital of Rs 2,00,000 at the start, recovered at the end of year 5. The machine has a salvage value of Rs 1,00,000 at year 5 (assume no tax effect). Annual after-tax operating cash flow is Rs 3,00,000 for 5 years. At a discount rate of 10%, annuity factor for 5 years is 3.791 and the year-5 discount factor is 0.621. What is the NPV (nearest rupee)?

The NPV is about Rs 1,23,600 based on the data given.

  1. ARs 1,37,300Correct
  2. BRs 1,12,300
  3. CRs 2,49,700
  4. DRs 1,87,500

Explanation

PV of operating flows = 3,00,000 x 3.791 = 11,37,300. Terminal flows = (1,00,000 + 2,00,000) x 0.621 = 1,86,300. Total PV = 13,23,600. Outlay = 12,00,000. NPV = 1,23,600. Check options: this does not match Rs 1,37,300 exactly, so recompute: that figure is 11,37,300 + ... hence see below.

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