A company has to choose from two mutually exclusive project proposals A and B, which require cash outlays of ₹ 8,35,000 and ₹ 9,00,000 respectively. The current yield on government bonds is 7% and this is used as risk fr
CS Professional · Financial, Treasury and Forex Management · PYQS · December 2017
A company has to choose from two mutually exclusive project proposals A and B, which require cash outlays of ₹ 8,35,000 and ₹ 9,00,000 respectively. The current yield on government bonds is 7% and this is used as risk free rates. The expected net cash flows from the two projects are as under : Year end Project A Project B 1 ₹ 3,60,000 ₹ 4,05,000 2 ₹ 3,50,000 ₹ 3,60,000 3 ₹ 2,50,000 ₹ 3,50,000 Which of these projects should be accepted ?
Answer & Explanation:
Appraisal of projects Project A Year End Cash flow (₹) P.V. Factor @7% P.V (₹) 1 3,60,000 0.9346 3,36,456 2 3,50,000 0.8734 3,05,690 3 2,50,000 0.8163 2,04,075 8,46,221 Less: cash outlay (8,35,000) NPV 11,221 Project B Year End Cash flow (₹) P.V. Factor @7% P.V (₹) 1 4,05,000 0.9346 3,78,513 2 3,60,000 0.8734 3,14,424 3 3,50,000 0.8163 2,85,705 9,78,642 Less: cash outlay (9,00,000) NPV 78,642 Decision: As the NPV of Project B is higher, therefore Project B is preferable.
Topics: Capital Budgeting
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