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CA Final · Advanced Financial Management · Advanced Capital Budgeting Decisions

Sundaram Textiles Ltd is evaluating a machine costing Rs 10,00,000 that will generate net cash inflows of Rs 4,00,000 each year for 4 years, with no salvage value. The cost of capital is 10%. The present value annuity factor for 4 years at 10% is 3.170. What is the NPV of the project?

The NPV is Rs 2,68,000. Discount the annual inflow of Rs 4,00,000 using the 4-year, 10% annuity factor of 3.170 to get Rs 12,68,000, then subtract the Rs 10,00,000 initial outlay. Simply summing undiscounted inflows would overstate the benefit.

  1. ARs 2,68,000Correct
  2. BRs 6,00,000
  3. CRs 1,68,000
  4. DRs 2,00,000

Explanation

PV of inflows = 4,00,000 x 3.170 = Rs 12,68,000. NPV = 12,68,000 - 10,00,000 = Rs 2,68,000. Rs 6,00,000 results from ignoring the time value of money (16,00,000 - 10,00,000), which is the key error.

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