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CA Intermediate · Financial Management and Strategic Management · Investment Decisions

Sundaram Textiles is evaluating a machine costing Rs 1,00,000 that yields net cash inflows of Rs 60,000 at the end of year 1 and Rs 66,000 at the end of year 2. The cost of capital is 10%. The Net Present Value is (PV factors at 10%: year 1 = 0.909, year 2 = 0.826):

The NPV is about Rs 9,060. Discount the year 1 inflow of 60,000 at 0.909 and the year 2 inflow of 66,000 at 0.826 to get roughly 1,09,056, then subtract the Rs 1,00,000 outlay. The undiscounted surplus of Rs 26,000 ignores the time value of money.

  1. ARs 8,334 approx.Correct
  2. BRs 26,000
  3. CRs 9,060 approx.
  4. DRs 1,00,000

Explanation

PV of inflows = 60,000 x 0.909 = 54,540; 66,000 x 0.826 = 54,516; total 1,09,056. NPV = 1,09,056 - 1,00,000 = Rs 9,056, approximately Rs 9,060. The Rs 8,334 option is wrong because it is not derived from these data. The Rs 26,000 figure is undiscounted surplus (1,26,000 - 1,00,000), which ignores time value.

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