5. Fill in the blanks:
a) Net Present Value= ______________ - Investment.
b) Ploughing back of profits is also called__________.
(Note: Question 2 to 5 carries 05 Marks each)
Question 2: Ashish Limited is considering three projects ‘X’, ‘Y’ and ‘Z’. Following are
the particulars in respect of them.
Particulars Project ‘X’ Project ‘Y’ Project ‘Z’
Cost (in Rs.) 1,00,000 1,40,000 1,40,000
Economic Life (in years) 10 10 10
Estimated Scrap (in Rs.) 5,000 10,000 14,000
Annual Savings Before Dep. (in Rs.) 16,000 25,000 20,000
Ignore income-tax, recommend the best of these projects and rank.
Calculate:
a. Pay-Back Period
b. Post Pay-Back Period
c. Post Pay-Back Profit
d. Index of Post Pay-Back Profit
Answers
Explanation:
Net Present Value (NPV) is the value of all future cash flows (positive and negative) over the entire life of an investment discounted to the present. NPV analysis is a form of intrinsic valuation and is used extensively across finance and accounting for determining the value of a business, investment security, capital project, new venture, cost reduction program, and anything that involves cash flow.
NPV Formula
The formula for Net Present Value is:
Net Present Value (NPV) Formula
Where:
Z1 = Cash flow in time 1
Z2 = Cash flow in time 2
r = Discount rate
X0 = Cash outflow in time 0 (i.e. the purchase price / initial investment)
Why is Net Present Value (NPV) Analysis Used?
NPV analysis is used to help determine how much an investment, project, or any series of cash flows is worth. It is an all-encompassing metric, as it takes into account all revenues, expenses, and capital costs associated with an investment in its Free Cash Flow (FCF).
In addition to factoring all revenues and costs, it also takes into account the timing of each cash flow that can result in a large impact on the present value of an investment. For example, it’s better to see cash inflows sooner and cash outflows later, compared to the opposite.
Answer:
Is an example of an investment