IAI Actuarial Core Principles · Business Finance · Key principles of finance
Sundaram Textiles is evaluating a machine that costs Rs 1,00,000 today and will produce a single cash inflow of Rs 1,21,000 at the end of year 2. The cost of capital is 10% per annum. What is the NPV of the project?
The NPV is zero. Discounting the Rs 1,21,000 inflow two years at 10% gives a present value of Rs 1,00,000, which equals the initial outlay. The project therefore earns exactly the cost of capital, so its IRR is 10%.
- ARs 0Correct
- BRs 21,000
- CRs 10,000
- DRs 1,21,000
- Rs 17,355
Explanation
PV of inflow = 1,21,000 / 1.1^2 = 1,21,000 / 1.21 = Rs 1,00,000. NPV = 1,00,000 - 1,00,000 = 0. Rs 21,000 is the undiscounted profit, which ignores the time value of money.
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