Question

A company intends to invest Rs 3 million into a project which would yield 10,15 and 20 percent during the first three years respectively. The company would also recover the original
investment after 3 years. If the company’s cost of capital is 12%, the NPV of the project
would be:
a) Rs 1,350,000 (b) Rs 168,754
c) Rs (39,783) (d) Rs 189,003

I need a solution too with some explanation. An answer without a solution will be considered as an answer only for points, hence reported.
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Answer 1

Answer:

The correct option is (d) Rs 189,003.

Step-by-step explanation:

Note: See the attached excel file for the calculation of the NPV of the project.

In the attached excel file, the following are used:

Original investment = Rs 3,000,000

Year 1 Income = Original investment * 10% = Rs 3,000,000 * 10% = Rs 300,000

Year 2 Income = Original investment * 15% = Rs 3,000,000 * 15% = Rs 450,000

Year 2 Income = Original investment * 20% = Rs 3,000,000 * 20% = Rs 600,000

In addition, we also use:

Discounting factor = 1 / (1 + r)^n ................ (1)

Where;

r = Company’s cost of capital = 12%, or 0.12

n = each relevant year 1, 2, or 3.

Substituting the values into equation (1), we have:

Discounting factor = 1 / (1 + 0.12)^n

From the attached excel file, the NPV of the project is Rs 189,003.

Therefore, the correct option is (d) Rs 189,003.

Download xlsx