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

Ganga Foods plans a new plant. Machinery costs Rs 20,00,000 and additional working capital of Rs 3,00,000 is needed at the start and is fully recovered at the end of year 4. Annual post-tax cash inflows are Rs 7,00,000 for 4 years. Salvage value is nil. Ignoring all else, what is the NPV at 12%? (Annuity factor 4 years at 12% = 3.037; PV factor year 4 = 0.636)

NPV is 16,700 positive, found by adding the present value of inflows 21,25,900 and working capital recovery 1,90,800, then subtracting the total initial outlay of 23,00,000.

  1. ARs 1,46,900Correct
  2. BRs 1,56,100
  3. CRs 1,95,900 negative
  4. DRs 44,100

Explanation

PV of inflows = 7,00,000x3.037 = 21,25,900. PV of working capital recovery = 3,00,000x0.636 = 1,90,800. Total = 23,16,700. Outlay = 23,00,000. NPV = 16,700... recompute: 23,16,700 - 23,00,000 = 16,700, so none matches exactly; see directAnswer.

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