Skip to content

CA Final · Integrated Business Solutions (Multidisciplinary Case Study with Strategic Management) · Advanced Financial Management

Case: Narmada Foods Ltd is considering a cold-storage project with an outlay of Rs 50 lakh today. It expects net cash inflows of Rs 30 lakh at the end of Year 1 and Rs 33 lakh at the end of Year 2, with no salvage value. The cost of capital is 10%. PV factors at 10%: Year 1 = 0.909, Year 2 = 0.826. What is the NPV, and what should the company do?

NPV is about Rs 4.53 lakh and the project should be accepted. Discounted inflows are 27.27 plus 27.26, totalling about Rs 54.53 lakh, which exceeds the Rs 50 lakh outlay. A positive NPV at the 10% cost of capital means the project adds value to shareholders.

  1. ANPV Rs 4.53 lakh approx; acceptCorrect
  2. BNPV Rs 13.00 lakh; accept
  3. CNPV Rs (4.53) lakh approx; reject
  4. DNPV Rs 4.53 lakh approx; reject

Explanation

PV of inflows = 30 x 0.909 + 33 x 0.826 = 27.27 + 27.258 = 54.528 lakh. NPV = 54.528 - 50 = 4.528, about Rs 4.53 lakh, which is positive so accept. Rs 13 lakh is the undiscounted surplus (63 - 50), which ignores the time value of money.

Did you get it right without looking?

One question tells you little. A timed set on Advanced Financial Management shows your real accuracy, how long you take and where you lose marks.

Practise Advanced Financial ManagementFree diagnostic mock

More Advanced Financial Management questions