Question
With project cost of Rs.300 lakh and cost of capital at
12%, the estimated profits over its lifetime of 5 years are Rs.10 lakh, Rs.10 lakh, Rs.30 lakh, Rs.40 lakh and Rs.50 lakh respectively. If the discount factors @ 12%, for the first five years are 0.89, 0.80, 0.71, 0.64 and 0.57 respectively, what is the net present value of project?Solution
Net present value (NPV) = present value of inflows – initial investment Calculating PV of inflows:
NPV = 92.30 – 300 lakh = -207.70 Inflow (profits) Discount factor Present Value 10,00,000 0.89 8,90,000 10,00,000 0.80 8,00,000 30,00,000 0.71 21,30,000 40,00,000 0.64 25,60,000 50,00,000 0.57 28,50,000 Total 92,30,000
1) agreement 2) manageable 3) favorable 4) encouraging 5) forwarded
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