VentureLtd has Rs30 Lakhs for Investment in capital projects...they have a option of investing in project A ,B ,C, D...Each project is independent and has a useful life 5yrs.
| PROJECTS | INITIAL OUTLAY | PV of cash flows |
|---|---|---|
| Rs | Rs | |
| A | 8lacs | 10 lacs |
| B | 15lacs | 19lacs |
| C | 7lacs | 11.4 lacs |
| D | 13lacs | 20lacs |
Which of the investment shoud be udertaken?
2) Assume cost of Capital =12%
Risk free intrest rate = 10%
[ coumpounded sum of rs 1 at 10% in 5 years =Rs1.611 & Disc factor of re 1 at 12 % rete for 5 yrs is0.567 ]
Solution :
| Proj | PV Of the CI | PV of the CO | Net Present Value |
|---|---|---|---|
| A | 10 | 8 | 2 |
| B | 19 | 15 | 4 |
| C | 11.4 | 7 | 4.4 |
| D | 20 | 13 | 7 |
| Total | 43 |
Since all the projects have +ve NPV all of the are acceptable.
But hare CO is Rs43 lakhs while company has 30 Lacs ie the of capital rationing so the optimal combination is selected
(so after adding the combinations).Project AC &D should be selected as it Has Max. NPV of 13.4 lacs
As for the 2nd part
Company has 2 lacs available [i think its {30-(8+7+13)}--->proj A,C &D
they say it should not be invested at 10% for 5yrs as the investment will have negetive return
after solving NPV=Pv of the Co is greater tha PV of the CI by 17313
So as final ans they said that
the projects are non divisable...Why?we can choose project A C & D right?
2)What is Riskfree intrest rate ?
3)Why have they calculated NPV of Rs2 lacs in the sum,I meanto say no where in the sum have they asked to find it?(It may sound silly but explain) i am a bit confused
Thank you.
CAclubindia
