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CMA Final · Strategic Financial Management · Evaluation of Risky Proposals for Investment Decisions

Ganga Polymers is considering a project with an initial cost of Rs 6,00,000 and an annual cash inflow of Rs 2,40,000 for 4 years. Using a risk-adjusted discount rate of 15%, what is the NPV? (PVIFA 15%, 4 years = 2.855)

Multiplying the annual inflow of Rs 2,40,000 by the annuity factor 2.855 gives a present value of Rs 6,85,200. Deducting the initial cost of Rs 6,00,000 leaves an NPV of Rs 85,200 at the risk-adjusted rate of 15%.

  1. ARs 85,200Correct
  2. BRs 6,85,200
  3. CRs 3,60,000
  4. DRs 1,45,200

Explanation

PV of inflows = 2,40,000 x 2.855 = 6,85,200. NPV = 6,85,200 - 6,00,000 = 85,200. Option 6,85,200 forgets to subtract the outlay.

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