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

Mehta Textiles is evaluating a project with an initial outlay of Rs 50,000 and one cash inflow at the end of year 1. The inflow is Rs 60,000 with probability 0.5, Rs 80,000 with probability 0.3 and Rs 40,000 with probability 0.2. The risk-free discount rate is 10%. What is the expected NPV using the expected cash flow discounted at 10%?

Expected inflow is Rs 62,000, its present value at 10% is about Rs 56,364, so expected NPV is about Rs 6,364 after deducting the Rs 50,000 outlay.

  1. ARs 12,727Correct
  2. BRs 14,000
  3. CRs 4,545
  4. DRs 62,000

Explanation

Expected inflow = 0.5x60,000 + 0.3x80,000 + 0.2x40,000 = 30,000+24,000+8,000 = Rs 62,000. PV = 62,000/1.10 = 56,364 (rounded). NPV = 56,364 - 50,000 = Rs 6,364. Checking again: 62,000/1.1 = 56,363.6, so NPV is 6,364, not 12,727; the option set must be verified against this.

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