CA INTERMEDIATE: COSTING & FM · INVESTMENT DECISIONS

Net present value (NPV)

NPV = Σ (Cash inflow × PV factor) − Initial investment. Accept if NPV > 0.

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Worked examples

Example 1 · level 1

Gupta Auto Parts is evaluating a project costing ₹1,05,000 now, with year-end cash inflows of Year 1: ₹70,000, Year 2: ₹69,000. Cost of capital 10%. PV factors: Y1 0.909, Y2 0.826. Find the NPV (₹; negative if the project loses value).

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Year 1: 70,000 × 0.909 = 63,630
Year 2: 69,000 × 0.826 = 56,994
PV of inflows = ₹1,20,624.
NPV = ₹1,20,624 − ₹1,05,000 = ₹15,624 → accept.

Answer: ₹15,624

Example 2 · level 2

Iyer Foods Ltd is evaluating a project costing ₹90,000 now, with year-end cash inflows of Year 1: ₹34,000, Year 2: ₹22,000, Year 3: ₹71,000. Cost of capital 10%. PV factors: Y1 0.909, Y2 0.826, Y3 0.751. Find the NPV (₹; negative if the project loses value).

Show solution

Year 1: 34,000 × 0.909 = 30,906
Year 2: 22,000 × 0.826 = 18,172
Year 3: 71,000 × 0.751 = 53,321
PV of inflows = ₹1,02,399.
NPV = ₹1,02,399 − ₹90,000 = ₹12,399 → accept.

Answer: ₹12,399

Example 3 · level 3

Mehta Polymers is evaluating a project costing ₹1,60,000 now, with year-end cash inflows of Year 1: ₹63,000, Year 2: ₹64,000, Year 3: ₹57,000, Year 4: ₹79,000. Cost of capital 15%. PV factors: Y1 0.870, Y2 0.756, Y3 0.658, Y4 0.572. Find the NPV (₹; negative if the project loses value).

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Year 1: 63,000 × 0.870 = 54,810
Year 2: 64,000 × 0.756 = 48,384
Year 3: 57,000 × 0.658 = 37,506
Year 4: 79,000 × 0.572 = 45,188
PV of inflows = ₹1,85,888.
NPV = ₹1,85,888 − ₹1,60,000 = ₹25,888 → accept.

Answer: ₹25,888