CA Foundation · Quantitative Aptitude · Mathematics of Finance
Verma Foods invests ₹2,00,000 in a project that returns ₹1,10,000 at the end of year 1 and ₹1,21,000 at the end of year 2. Using a discount rate of 10% per annum, what is the Net Present Value (NPV) of the project?
The NPV is zero. Discounting the inflows at 10% gives ₹1,00,000 from year 1 and ₹1,00,000 from year 2, totalling ₹2,00,000, which equals the initial outlay. Subtracting the outlay leaves no surplus, so the project exactly earns the 10% required return.
- A₹0
- B₹31,000
- C₹10,000Correct
- D₹-10,000
Explanation
PV of inflows = 1,10,000/1.1 + 1,21,000/1.21 = 1,00,000 + 1,00,000 = 2,00,000. NPV = 2,00,000 - 2,00,000 = 0. Hence the correct value is ₹0 and not any other option; the ₹31,000 option wrongly takes undiscounted inflows 2,31,000 minus 2,00,000.
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