Net Present Value Calculation
The Net Present Value (NPV) assesses project viability by comparing the present value of future cash flows to the initial investment. A positive NPV indicates potential profitability.
Project Cash Flow Analysis
The project requires an initial investment and generates cash inflows over four years. The opportunity cost (discount rate) is 10%, with provided discounting factors for each period.
| Year | Cash Inflow (₹) | Discounting Factor (10%) | Present Value (₹) |
| 0 (Initial Cost) | -3,000 | 1.00 | -3,000.00 |
| 1 | 500 | 0.91 | 455.00 |
| 2 | 1,000 | 0.83 | 830.00 |
| 3 | 1,000 | 0.75 | 750.00 |
| 4 | 1,100 | 0.68 | 748.00 |
NPV Calculation Steps
-
Calculate Present Value (PV) of each Cash Inflow:
Use the formula $\text{PV} = \text{Cash Inflow} \times \text{Discounting Factor}$.
- Year 1 PV: $500 \times 0.91 = 455$
- Year 2 PV: $1,000 \times 0.83 = 830$
- Year 3 PV: $1,000 \times 0.75 = 750$
- Year 4 PV: $1,100 \times 0.68 = 748$
- Sum the Present Values: Total PV of Inflows = $455 + 830 + 750 + 748 = 2,783$
- Determine Net Present Value (NPV): Subtract the initial investment from the total PV of inflows. $\text{NPV} = \text{Total PV of Inflows} - \text{Initial Cost}$ $\text{NPV} = 2,783 - 3,000 = -217$
The Net Present Value (NPV) for this project is - ₹ 217.
Important Questions from Capital budgeting decisions
Zero Based Budgeting (ZBB) lays emphasis on:
A. Allocation of resources based on cost-benefit terms
B. Unlimited deficit financing
C. Preparing a new budget right from the scratch
D. Preparing the budget, neglecting the history of expenditure
Choose the correct answer from the options given below:
Under which of the following situations the decision outcome on evaluation of investment opportunities vary under NPV and IRR methods per se?
a) Time disparity
b) Cost disparity
c) Life disparity
d) Volume disparity
Choose the correct combination of situations:
Which one of the following methods of Capital Budgeting assumes that cash-inflows are reinvested at the project’s rate of return ?
Which of the following variables is not known in Internal Rate of Return methods of capital budgeting?
Indicate the correct code for discounted cash flow techniques for capital investment proposals from the following:
(i) Net Present Value Method
(ii) Internal Rate of Return method
(iii) Excess Benefit-Cost Ratio method
(iv) Net Terminal Value method
Choose the correct answer from the code given below :
