Question

Your company is considering two mutually exclusive projects, A and B. Project A involves an outlay of Rs 100 million which will generate an expected cash inflow of Rs 25 million per year for 6 years. Project B calls for an outlay of Rs 50 million which will produce an expected cash inflow of Rs 13 million per year for 6 years. The company’s cost of capital is 12 percent. What is the NPV for the project-B?​

Answer 1

Concept:

A financial statistic called net present value (NPV) aims to quantify the total value of a potential investment opportunity.

When the periodic payment amount is multiplied by the present value interest factor (PVIF) of an annuity, the present value of a series of annuities can be calculated.

The ability of a business to generate cash flow from its operations is revealed by the financial performance indicator known as cash flow after taxes (CFAT).

Given:

The initial outlet of Project A and B is Rs. 100 million and 50 million respectively.

The cash inflow for Project A and B is Rs. 25 million per year and Rs. 13 million per year respectively.

Find:

The net present value for Project B.

Solution:

The formula for Net present value is given as:

$NPV=PVIF-PVOF=CFAT\times PVAF -initial$

For project B,

The initial outlay is Rs. 50 million.

The cash inflow (CFAT) is Rs. 13 million per year for 6 years.

So, the present value interest factor is $4.111$ .

Therefore, the NVP for project B is:

$NPV=CAFT\times PVAF-initial\\NPV=13\times4.111-50\\NPV=53.443-50\\NPV=3.443$

The net present value for Project B is Rs. $3.443$ million.

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