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IAI Actuarial Core Principles · Business Finance · Cost of capital and evaluating investment projects

Project Kaveri requires an outlay of Rs 500,000 now and returns Rs 600,000 in exactly one year. The firm's cost of capital is 15%. Which statement is correct?

The IRR is 20% because Rs 600,000 on Rs 500,000 gives a 20% return in one year. At 15% the NPV is about Rs 21,739, positive, so the project should be accepted.

  1. AIRR is 20% and the project should be accepted, as NPV is about Rs 21,739Correct
  2. BIRR is 20% and the project should be rejected, as it exceeds the cost of capital
  3. CIRR is 15% and NPV is zero
  4. DIRR is 12% and the project should be rejected
  5. IRR is 20% and NPV is Rs 100,000

Explanation

IRR: 600,000/500,000 - 1 = 20%. NPV at 15% = 600,000/1.15 - 500,000 = 521,739 - 500,000 = 21,739. Since IRR exceeds 15% and NPV is positive, accept. Rs 100,000 ignores discounting.

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