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

Meera Auto Ltd invests Rs 10 lakh in a project with a two-year life. Expected net cash inflows are Rs 6 lakh in Year 1 and Rs 8 lakh in Year 2. Using the risk-adjusted discount rate of 15%, what is the NPV? (Discount factors at 15%: Year 1 = 0.8696, Year 2 = 0.7561)

The NPV is about Rs 1.26 lakh. Discounting Rs 6 lakh and Rs 8 lakh at 15 percent gives a present value of inflows of roughly Rs 11.27 lakh, and deducting the Rs 10 lakh outlay leaves a positive NPV of about Rs 1.26 lakh.

  1. ARs 1.26 lakhCorrect
  2. BRs 4.00 lakh
  3. CRs 11.26 lakh
  4. DRs 0.26 lakh

Explanation

PV of inflows = 6 x 0.8696 + 8 x 0.7561 = 5.2176 + 6.0488 = 11.2664 lakh. NPV = 11.2664 - 10 = Rs 1.27 lakh, about Rs 1.26 lakh. Rs 11.26 lakh is the PV of inflows without deducting the outlay.

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