You have received a project proposal with a life expectancy of 5 years:
Particulars Years Amount in ₹
Initial Investment 0 6,00,000
Cash inflows 1 1,20,000
2 1,20,000
3 1,80,000
4 1,80,000
5 2,20,000
Calculate the Net Present Value of the project using the discount rate of 9%.
To calculate the Net Present Value (NPV) of the project, we need to discount each cash inflow to its present value and subtract the initial investment.
First, let's calculate the present value factor for each year using the formula:
Present Value Factor (PVF) = 1 / (1 + discount rate)^year
For a discount rate of 9%, we have:
PVF(Y1) = 1 / (1 + 0.09)^1 = 0.9174
PVF(Y2) = 1 / (1 + 0.09)^2 = 0.8425
PVF(Y3) = 1 / (1 + 0.09)^3 = 0.7722
PVF(Y4) = 1 / (1 + 0.09)^4 = 0.7084
PVF(Y5) = 1 / (1 + 0.09)^5 = 0.6499
Next, let's calculate the present value (PV) of each cash inflow by multiplying the cash inflow by the corresponding PVF:
PV(Y1) = 1,20,000 * 0.9174 = 1,10,088
PV(Y2) = 1,20,000 * 0.8425 = 1,01,100
PV(Y3) = 1,80,000 * 0.7722 = 1,39,196
PV(Y4) = 1,80,000 * 0.7084 = 1,27,512
PV(Y5) = 2,20,000 * 0.6499 = 1,43,378
Now, let's calculate the NPV by subtracting the initial investment from the sum of the present values:
NPV = PV(Y1) + PV(Y2) + PV(Y3) + PV(Y4) + PV(Y5) - Initial Investment
= 1,10,088 + 1,01,100 + 1,39,196 + 1,27,512 + 1,43,378 - 6,00,000
= 7,21,274 - 6,00,000
= 1,21,274
Therefore, the Net Present Value (NPV) of the project is ₹1,21,274.