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CA Final · Advanced Financial Management · Advanced Capital Budgeting Decisions

Project P (2-year life) has an NPV of ₹20,000 at 10% and Project Q has a 3-year life. The firm wants to compare them using the replacement chain method over a common 6-year horizon, assuming Project P is repeated with the same NPV each time. Using 1/1.21 = 0.8264 and 1/1.4641 = 0.6830, what is the NPV of the chain for Project P?

The chain NPV is about ₹50,188. Project P is repeated three times in six years, with later NPVs arising at years 2 and 4, so each is discounted at 10% before adding to the first ₹20,000. Simple addition to ₹60,000 ignores discounting.

  1. A₹60,000
  2. B₹36,528
  3. C₹20,000
  4. D₹50,188Correct

Explanation

Over 6 years P is repeated three times, at t=0, t=2 and t=4. NPV = 20,000 × (1 + 0.8264 + 0.6830) = 20,000 × 2.5094 ≈ ₹50,188. Adding the NPVs undiscounted gives ₹60,000, and omitting the third cycle gives ₹36,528.

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