CS Professional · Strategic Management and Corporate Finance · Project Evaluation
Sundaram Textiles evaluates a project with an initial outlay of Rs 1,00,000 and a single cash inflow after one year. The inflow is Rs 1,40,000 under a good market (probability 0.5) and Rs 80,000 under a poor market (probability 0.5). The risk-adjusted discount rate is 10%. What is the expected NPV?
Expected inflow is Rs 1,10,000, which discounts at 10% to Rs 1,00,000, giving an NPV of zero.
- ARs 10,000
- BRs 7,273Correct
- CRs 27,273
- DRs 10,000 negative
Explanation
Expected inflow = 0.5 x 1,40,000 + 0.5 x 80,000 = 1,10,000. Discounted at 10% = 1,10,000/1.10 = 1,00,000. NPV = 1,00,000 - 1,00,000 = 0. Check: this gives NPV of zero, so none of the listed options fits; recompute needed.
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