NPV Question

Submitted by san on Tue, 04/23/2013 - 04:03


Your organization discusses running a project which will entail an investment of Rs20,000,000. The product from the project is forecasted to create revenues of Rs.50,00,000 in the first year after the end of the project and of Rs 84,00,000 in each of the two following years. What is true for the Net present value of the project over the three years cycle at a Discount rate of 10%?

 A)The net present value is negative, which makes the project attractive.
B) The net present value is negative, which makes the project unattractive.
C)The net present value is positive, which makes the project unattractive.
D) The net present value is positive, which makes the project attractive.

 

Answer is "B" . Please provide the explanation

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Hemant Tandon

Tue, 04/23/2013 - 04:59

 NPV = -C0 + C1/ (1+R) + C2/ (1+R) 2…………CT/ (1+R) T

  • -C0 = Initial Investment
  • C = Cash Flow
  • R= Discount Rate
  • T= Time

NPV = - 20000000 + 5000000/ (1+0.1) + 8400000/ (1+0.1)2 + 8400000/ (1+0.1)3

= - 20000000 + 4545454.54 + 6942148.76 + 6311044.32

= -2201352

So, NPV is negative, and a Project with negative NPV is unfavourable.

Regards,

Hemant, PMP

san

Tue, 04/23/2013 - 06:06

Thank you Hemanth for the detailed explanation