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

Godavari Foods has a Rs 12,00,000 project with annual cash inflows of Rs 3,00,000 for 8 years. The PV annuity factor at 15% for 8 years is 4.487 and at 20% is 3.837. Which statement about the project's NPV at 15% and its acceptance is correct?

At 15% the present value of inflows is Rs 13,46,100, which exceeds the Rs 12,00,000 outlay by Rs 1,46,100. A positive NPV means the project returns more than 15%, so it should be accepted.

  1. ANPV is positive Rs 1,46,100, so accept at 15%Correct
  2. BNPV is positive Rs 1,46,100, so reject because IRR is below 15%
  3. CNPV is negative Rs 1,46,100, so reject
  4. DNPV is positive Rs 13,46,100, so accept

Explanation

PV of inflows = 3,00,000 x 4.487 = 13,46,100. NPV = 13,46,100 - 12,00,000 = 1,46,100, positive, so accept. Since NPV is positive at 15%, IRR exceeds 15%; the second option contradicts this.

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