The ABC Group wants to diversify its business and plan to take up a new project that requires an initial investment of Rs. Rs.4,00,000. They will pay it off in 4 years It will generate Rs.40,000 in the first year, Rs.80,000 in the second year, Rs. 16,00,000 in the third year, and Rs.2,59,600 in the fourth year. Find out the feasibility of this investment project if the discount rate is 8%
To determine the feasibility of this investment project, we need to calculate the net present value (NPV) of the project.
NPV is calculated as the sum of the present values of all the cash inflows and outflows of the project. The formula for calculating NPV is:
NPV = CF1/(1+r)^1 + CF2/(1+r)^2 + CF3/(1+r)^3 + CF4/(1+r)^4 - Initial Investment
Where:
CF1 = Cash flow in year 1 = Rs.40,000
CF2 = Cash flow in year 2 = Rs.80,000
CF3 = Cash flow in year 3 = Rs.1,60,000
CF4 = Cash flow in year 4 = Rs.2,59,600
r = Discount rate = 8%
Initial Investment = Rs.4,00,000
Plugging in the values, we get:
NPV = 40,000/(1+0.08)^1 + 80,000/(1+0.08)^2 + 1,60,000/(1+0.08)^3 + 2,59,600/(1+0.08)^4 - 4,00,000
NPV = 37,037.04 + 66,115.70 + 1,17,688.69 + 1,78,394.74 - 4,00,000
NPV = 199,236.17 - 4,00,000
NPV = -2,00,763.83
Since the NPV is negative (-2,00,763.83), this means that the project is not feasible at a discount rate of 8%. The company would end up losing money if they invest in this project.