CA Intermediate · Financial Management and Strategic Management · Investment Decisions
Project Alpha of Surya Engineers has a 4-year life and an NPV of ₹3,17,000 at a cost of capital of 10%. The 4-year annuity factor at 10% is 3.170. What is the equivalent annual annuity (annualised NPV) of the project?
The equivalent annual annuity is ₹1,00,000. It is found by dividing the project's NPV of ₹3,17,000 by the 4-year annuity factor of 3.170 at 10%. This converts the NPV into a level yearly amount, which helps compare projects with unequal lives.
- A₹79,250
- B₹31,700
- C₹1,00,000Correct
- D₹10,04,890
Explanation
Equivalent annual annuity = NPV / annuity factor = 3,17,000 / 3.170 = ₹1,00,000. Dividing NPV by 4 gives ₹79,250, which ignores the time value of money. Multiplying NPV by the factor (₹10,04,890) uses the wrong operation.
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