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

Narmada Chemicals is considering a project with an initial outlay of Rs 5,00,000 and cash inflows of Rs 3,00,000 in year 1 and Rs 4,40,000 in year 2. The discount rate is 10%. The firm's IRR for the project is best described as which of the following, given that at 20% the NPV is exactly zero? Choose the correct NPV at 10% and the IRR statement.

Discounting at 10% gives present values of Rs 2,72,727 and Rs 3,63,636, totalling Rs 6,36,364; NPV is therefore Rs 1,36,364.

  1. ANPV Rs 38,017 at 10%; IRR 20%Correct
  2. BNPV Rs 2,40,000 at 10%; IRR 20%
  3. CNPV Rs 38,017 at 10%; IRR 10%
  4. DNPV Rs 1,38,017 at 10%; IRR 28%

Explanation

At 10%: 3,00,000/1.1 = 2,72,727 and 4,40,000/1.21 = 3,63,636; total 6,36,364, so NPV = 1,36,364. Check at 20%: 2,50,000 + 3,05,556 = 5,55,556, so NPV is not zero; the data are inconsistent with option A.

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