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CA Final · Advanced Financial Management · Advanced Capital Budgeting Decisions

Sundaram Textiles Ltd is evaluating a new weaving unit costing ₹50 lakh. The present value of its cash inflows depends on market demand: ₹80 lakh under strong demand (probability 0.3), ₹60 lakh under moderate demand (probability 0.5) and ₹40 lakh under weak demand (probability 0.2). What is the expected NPV of the project?

The expected NPV is ₹12 lakh. Weighting the inflow present values by their probabilities gives ₹62 lakh, and deducting the ₹50 lakh outlay leaves ₹12 lakh. Using the probability-weighted figure, not a simple average, is essential.

  1. A₹12 lakhCorrect
  2. B₹62 lakh
  3. C₹10 lakh
  4. D₹8 lakh

Explanation

Expected PV of inflows = 0.3×80 + 0.5×60 + 0.2×40 = 24 + 30 + 8 = ₹62 lakh. Expected NPV = 62 − 50 = ₹12 lakh. The ₹62 lakh option forgets to deduct the outlay. The ₹10 lakh option uses a simple average of 60 instead of probability weights.

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