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CS Executive · Corporate Accounting and Financial Management · Capital Budgeting

Sundaram Ltd. is evaluating a project with an initial outlay of ₹1,00,000 and a single expected cash inflow of ₹1,32,000 at the end of year 1. The risk-free rate is 10% and the certainty-equivalent coefficient for the year 1 cash flow is 0.80. What is the NPV using the certainty-equivalent method?

The certain cash flow is ₹1,32,000 x 0.80 = ₹1,05,600. Discounting at the 10% risk-free rate gives a present value of ₹96,000. Subtracting the ₹1,00,000 outlay gives an NPV of negative ₹4,000, so the project should be rejected.

  1. A- ₹4,000Correct
  2. B₹20,000
  3. C- ₹100
  4. D₹32,000

Explanation

Certain cash flow = 1,32,000 x 0.80 = 1,05,600. Discounted at the risk-free rate of 10%: 1,05,600/1.10 = 96,000. NPV = 96,000 - 1,00,000 = -4,000. Option B wrongly discounts without adjusting, giving 1,20,000 - 1,00,000 = 20,000.

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