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 the cash inflows from each year by the discount rate of 9% and then subtract the initial investment.
Here's how to calculate it:
Year 1:
Discount factor = 1 / (1 + 0.09) ^ 1 = 0.9174
Present value = 1,20,000 * 0.9174 = 1,10,088.80
Year 2:
Discount factor = 1 / (1 + 0.09) ^ 2 = 0.8427
Present value = 1,20,000 * 0.8427 = 1,01,124.40
Year 3:
Discount factor = 1 / (1 + 0.09) ^ 3 = 0.7722
Present value = 1,80,000 * 0.7722 = 1,38,996.00
Year 4:
Discount factor = 1 / (1 + 0.09) ^ 4 = 0.7084
Present value = 1,80,000 * 0.7084 = 1,27,512.00
Year 5:
Discount factor = 1 / (1 + 0.09) ^ 5 = 0.6483
Present value = 2,20,000 * 0.6483 = 1,42,226.00
Now, let's calculate the NPV:
NPV = Present value of cash inflows - Initial investment
NPV = 1,10,088.80 + 1,01,124.40 + 1,38,996.00 + 1,27,512.00 + 1,42,226.00 - 6,00,000
NPV = ₹2,19,947.20
The Net Present Value (NPV) of the project using a discount rate of 9% is ₹2,19,947.20.