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CS Professional · Strategic Management and Corporate Finance · Project Evaluation

Verma Agro Ltd invests Rs 2,00,000 in a project that yields cash inflows of Rs 1,10,000 at the end of year 1 and Rs 1,21,000 at the end of year 2. The cost of capital is 10%. What is the NPV of the project?

The NPV is Rs 10,000 only if present values exceed cost, but here discounted inflows total Rs 2,00,000, equal to the outlay, so NPV is zero.

  1. ARs 31,000
  2. BRs 10,000Correct
  3. CRs 0
  4. DRs 21,000

Explanation

PV of year 1 = 1,10,000/1.10 = 1,00,000. PV of year 2 = 1,21,000/1.21 = 1,00,000. Total PV = 2,00,000. NPV = 2,00,000 - 2,00,000 = 0 is not right; recheck: total PV is 2,00,000 so NPV = 0.

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