How to calculate net present value using Net present value (NPV)?

Following are cash flow for P1 and P2

Year	1	2	3	4	5
Project 1 (P1)	4000	4600	5800	7200	3500
Project (P2)	4000	4800	3600	5400	3500

Year 1	Year 2	Year 3	Year 4	Year 5
0.925	0.892	0.749	0.671	0.602

Present value Rs.1/- @10% (discounted factor) using present value table

Solution

The solution is stated below −

For Project 1 (P1) −

Initial investment = Rs. 35000/-

Year	Discounted factor	Returns	Net present value
1	0.925	4000	3700
2	0.892	4600	4103.2
3	0.749	5800	4344.2
4	0.671	7200	4831.2
5	0.602	3500	2107
		25100	19085.6

Present value = Rs.19085.6/-

Return on investment = (25100-19085.6)/35000 => 0.17184 => 17.184%

For Project 2 (P2) −

Initial investment = Rs. 23000/-

Year	Discounted factor	Returns	Net present value
1	0.925	4000	3700
2	0.892	4800	4281.6
3	0.749	3600	2696.4
4	0.671	5400	3623.4
5	0.602	3500	2107
		21300	16408.4

Present value = Rs.19085.6/-

Return on investment = (21300-16408.4)/23000 => 0.21268 => 21.268%

Hence, from the above calculations:

Return on investments for P2 is more than P1

So, project P2 is selected.

Mandalika

Updated on: 25-Sep-2020

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