Question
A company is evaluating two mutually exclusive projects,
A and B, both requiring an initial investment of ₹1,50,00,000. The cost of capital is 10%. The cash flows for each project over 5 years are as follows: • Project A: ₹45,00,000 each year • Project B: ₹20,00,000, ₹40,00,000, ₹60,00,000, ₹50,00,000, ₹40,00,000 Calculate the Net Present Value (NPV) of each project and determine which project should be selected.Solution
Using 10% discount factor: Project A: Annuity of ₹45,00,000 for 5 years → PV = ₹45,00,000 × 3.791 = ₹1,70,59,500 NPV = ₹1,70,59,500 – ₹1,50,00,000 = ₹20,59,500 Project B: Use individual discounting: • Yr 1: 20,00,000 × 0.909 = ₹18,18,000 • Yr 2: 40,00,000 × 0.826 = ₹33,04,000 • Yr 3: 60,00,000 × 0.751 = ₹45,06,000 • Yr 4: 50,00,000 × 0.683 = ₹34,15,000 • Yr 5: 40,00,000 × 0.621 = ₹24,84,000 Total PV = ₹1,55,27,000 → NPV = ₹5,27,000 Hence, Project A is better with higher NPV.
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