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company is thinking about investing Rs. 1,000 in a new factory. According to budget analysis, the factory will generate the following cash flows:Year 1- Rs. 200Year 2- Rs. 600Year 3- Rs. 800Year 4- Rs. 200If the company requires that its projects should return 12%, what would be its net present value?Options Rs. 353.41 Rs. 350 Rs. 325.25 Rs. 310.26

Question

company is thinking about investing Rs. 1,000 in a new factory. According to budget analysis, the factory will generate the following cash flows:Year 1- Rs. 200Year 2- Rs. 600Year 3- Rs. 800Year 4- Rs. 200If the company requires that its projects should return 12%, what would be its net present value?Options Rs. 353.41 Rs. 350 Rs. 325.25 Rs. 310.26

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Solution

To calculate the Net Present Value (NPV), we need to discount the future cash flows to the present value and then subtract the initial investment.

The formula for calculating the present value (PV) is:

PV = CF / (1 + r)^n

where:

  • CF is the cash flow for the year,
  • r is the discount rate (in this case, 12% or 0.12), and
  • n is the year.

Let's calculate the present value for each year:

Year 1: PV = 200 / (1 + 0.12)^1 = Rs. 178.57 Year 2: PV = 600 / (1 + 0.12)^2 = Rs. 476.19 Year 3: PV = 800 / (1 + 0.12)^3 = Rs. 567.43 Year 4: PV = 200 / (1 + 0.12)^4 = Rs. 142.24

The total present value of the future cash flows is Rs. 1364.43 (Rs. 178.57 + Rs. 476.19 + Rs. 567.43 + Rs. 142.24).

Finally, we subtract the initial investment from the total present value to get the NPV:

NPV = Total PV - Initial Investment NPV = Rs. 1364.43 - Rs. 1000 = Rs. 364.43

So, the net present value of the project is Rs. 364.43. However, this option is not available in the given options. There might be a mistake in the question or the options provided.

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