Calculate NPV of the 2 projects and suggest which of the 2 projects should be accepted assuming a discount rate of 10%
Project A Project B
Initial Investment Rs.40000 Rs.60000
Estimated life 5 years 5 years
Scrap value 2000 4000
Profit before depn & after taxes
1 12000 35000
2 18000 25000
3 7000 12000
4 5000 4000
5 4000 4000
The present value of Rupee 1 at 10% for the 1st year = 0.909
2nd year = 0.826
3rd year = 0.751
4th year = 0.683
5th year = 0.621
6th year = 0.5646
7th year = 0.513
8th year = 0.466
Project A
Year cash inflow present value of Rs.1 Present value of
At 10% cash inflow
1 12000 0.909 10908
2 18000 0.826 14869
3 7000 0.751 5257
4 5000 0.683 3415
5 4000 0.621 2484
5 Scrap value 2000 0.621 1242
Total cash inflow 38174
Less PV of initial investment – 40000
= -1825
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This project is rejected because NPV is – ve.
Project B
Year cash inflow present value of Rs.1 present value of
At 10% cash inflow
1 35000 0.909 31815
2 25000 0.826 20650
3 12000 0.751 9012
4 4000 0.683 2732
5 4000 0.621 2484
5 scrap value 4000 0.621 2484
Total cash inflow 69177
Less PV of initial investment – 60000
9177
Here NPV is +ve. So Project B is selected
