IAI Actuarial Core Principles · Business Finance · Cost of capital and evaluating investment projects
Sunrise Pharma evaluates a project with outlay ₹6,00,000 and inflows of ₹3,30,000 at the end of year 1 and ₹4,84,000 at the end of year 2. At a 10% discount rate, what is the NPV?
The NPV is ₹1,00,000. Discounting the year 1 inflow of ₹3,30,000 at 10% gives ₹3,00,000 and the year 2 inflow of ₹4,84,000 gives ₹4,00,000. The total of ₹7,00,000 less the ₹6,00,000 outlay leaves ₹1,00,000.
- A₹1,00,000Correct
- B₹1,14,000
- C₹94,000
- D₹2,14,000
- ₹1,30,000
Explanation
PV year 1 = 3,30,000/1.10 = 3,00,000. PV year 2 = 4,84,000/1.21 = 4,00,000. Total PV = 7,00,000, so NPV = 7,00,000 − 6,00,000 = ₹1,00,000. Using undiscounted inflows would wrongly give ₹2,14,000.
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