An initial outlay of ₹ 24 lakh is contemplated in a project, for which the following cash flow estimates have been prepared : Year Net CFAT (₹) Probability Year 1 8,00,000 0.30 7,00,000 0.40 5,00,000 0.30 Year 2 7,00,000

(i) Computation of Expected cash flow (ECFAT) Year Net Cash flow after tax (CFAT) Probability Amount (₹) Total (Expected CFAT) Year 1 8,00,000 0.30 2,40,000 7,00,000 0.40 2,80,000 5,00,000 0.30 1,50,000 6,70,000 Year 2 7,00,000 0.25 1,75,000 9,00,000 0.35 3,15,000 10,00,000 0.40 4,00,000 8,90,000 Year 3 to 5 5,20,000 0.45 2,34,000 6,40,000 0.25 1,60,000 8,20,000 0.30 2,46,000 6,40,000 Calculation of Net Present value (NPV) using Risk Adjusted discount rate (RADR) of 17% Year Cash flow (₹) PVF @ 17% PV of cash flow (₹) 0 (24,00,000) 1.000 (24,00,000) 1 6,70,000 0.8547 5,72,649 2 8,90,000 0.7305 6,50,145 3 6,40,000 0.6244 3,99,616 4 6,40,000 0.5337 3,41,568 5 6,40,000 0.4561 2,91,904 NPV (1,44,118) Decision: Since the NPV of the project at 17% is negative (₹ 1,44,118), hence the project should be rejected. (ii) Maximum project cost for acceptance The maximum project cost for acceptance should be curtailed and revised downward to make the NPV zero. Maximum project cost = Initial Outlay - NPV (if NPV is negative) = ₹ 24,00,000 - ₹ 1,44,118 = ₹ 22,55,882