Question

A project initially costs Rs. 5,000 and generates year-end cash inflows of Rs. 1800, Rs. 1600, Rs. 1400, Rs. 1200 and Rs. 1000 respectively in five years of its life. If the rate of return is 10%, the net present value (NPV) will be
1. Rs. 500
2. Rs. 450
3. Rs. 400
4. Rs. 350

Answer 1

Correct Answer - Option 2 : Rs. 450

Concept:

\({\rm{NPV\;}} = {\rm{\;}}\sum \frac{{C{F_n}}}{{{{\left( {1 + i} \right)}^n}}} - initial\;investment\)

Where, i = rate of return, CF_n = Cash flows in the time period n, n = time period

Calculation:

NPV = \(\left[ {\frac{{1800}}{{1.1}} + \frac{{1600}}{{{{1.1}^2}}} + \frac{{1400}}{{{{1.1}^3}}} + \frac{{1200}}{{{{1.1}^4}}} + \frac{{1000}}{{{{1.1}^5}}}} \right] - 5000\)

NPV = [1636.36 + 1322.31 + 1051.84 + 819.62 + 620.92]

∴ NPV = 451