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CMA Intermediate · Financial Management and Business Data Analytics · Capital Budgeting

Kaveri Pharma is considering a project with an initial outlay of Rs 3,00,000 and annual inflows of Rs 1,00,000 for 5 years. The discount rate is 10%. Given the annuity factor for 5 years at 10% = 3.791 and the annuity factor for 4 years at 10% = 3.170, what is the discounted payback position, and is the project acceptable on NPV?

NPV is Rs 79,100, so the project is acceptable. The present value of the first four years' inflows is Rs 3,17,000, which already exceeds the Rs 3,00,000 outlay, so discounted payback occurs within four years.

  1. ANPV Rs 79,100; discounted payback within 4 years
  2. BNPV Rs 79,100; discounted payback beyond 4 years but within 5 yearsCorrect
  3. CNPV Rs 2,00,000; discounted payback within 3 years
  4. DNPV negative; project rejected

Explanation

NPV = 1,00,000 x 3.791 - 3,00,000 = 79,100. Present value of inflows over 4 years = 3,17,000, which exceeds 3,00,000, so discounted payback is within 4 years. Recheck: 3,17,000 > 3,00,000, so the 4-year cumulative PV recovers the outlay. Hence the option 'beyond 4 years' is wrong and the correct choice is that NPV is 79,100 with discounted payback within 4 years.

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