Skip to content

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

Rohan Ltd is considering a project with an initial outlay of Rs 50 lakh. Annual cash inflow is Rs 20 lakh for 4 years, discounted at 12% (annuity factor for 4 years = 3.0373). Sensitivity analysis is run on the annual cash inflow. By what percentage can the annual inflow fall before NPV becomes zero?

The annual inflow can fall by about 17.7 percent. Base NPV is Rs 10.75 lakh on PV of inflows of Rs 60.75 lakh, and the fall that wipes out NPV equals NPV divided by PV of inflows, which is roughly 17.7 percent.

  1. A17.7%Correct
  2. B21.9%
  3. C10.8%
  4. D82.3%

Explanation

Base PV of inflows = 20 x 3.0373 = 60.746 lakh. NPV = 10.746 lakh. Break-even fall = NPV / PV of inflows = 10.746 / 60.746 = 17.69%, about 17.7%. 82.3% is the remaining fraction, not the fall. 21.9% wrongly divides by the outlay (10.746/50 = 21.5%).

Did you get it right without looking?

One question tells you little. A timed set on Evaluation of Risky Proposals for Investment Decisions shows your real accuracy, how long you take and where you lose marks.

Practise Evaluation of Risky Proposals for Investment DecisionsFree diagnostic mock

More Evaluation of Risky Proposals for Investment Decisions questions