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Select Any One Of the Following Options: A Project has intial outflow of Rs. 1,50,000, useful life of 5-years and incremental post tax annual cashflow of Rs. 45,000. The appropriate discount rate for the project is 12%, what is the NPV of the project?Rs. -9,728Rs. 10, 332Rs. 12,215Rs. -18,245

Question

Select Any One Of the Following Options: A Project has intial outflow of Rs. 1,50,000, useful life of 5-years and incremental post tax annual cashflow of Rs. 45,000. The appropriate discount rate for the project is 12%, what is the NPV of the project?Rs. -9,728Rs. 10, 332Rs. 12,215Rs. -18,245

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Solution

To calculate the Net Present Value (NPV) of the project, we need to discount the incremental post-tax annual cash flows to the present and then subtract the initial outflow.

Here are the steps:

  1. Calculate the present value of the annual cash flows: The formula for the present value (PV) of each cash flow is CF / (1 + r)^n, where CF is the cash flow, r is the discount rate, and n is the period.

  2. Sum up the present values of the cash flows: This gives us the total present value of the cash flows.

  3. Subtract the initial outflow: This gives us the NPV of the project.

Let's calculate:

  1. The present value of the cash flows for each year are:

    Year 1: 45,000 / (1 + 0.12)^1 = 40,178.57 Year 2: 45,000 / (1 + 0.12)^2 = 35,874.08 Year 3: 45,000 / (1 + 0.12)^3 = 32,020.78 Year 4: 45,000 / (1 + 0.12)^4 = 28,589.98 Year 5: 45,000 / (1 + 0.12)^5 = 25,526.77

  2. The total present value of the cash flows is 40,178.57 + 35,874.08 + 32,020.78 + 28,589.98 + 25,526.77 = 162,190.18

  3. The NPV of the project is 162,190.18 - 150,000 = Rs. 12,190.18

So, the closest option is Rs. 12,215.

This problem has been solved

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