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
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