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

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Following are cash flow for P1 and P2

Year12345
Project 1 (P1)40004600580072003500
Project (P2)40004800360054003500


Year 1Year 2Year 3Year 4Year 5
0.9250.8920.7490.6710.602

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/-

 

YearDiscounted factorReturnsNet present value
10.92540003700
20.89246004103.2
30.74958004344.2
40.67172004831.2
50.60235002107


2510019085.6

 

Present value = Rs.19085.6/- 

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

For Project 2 (P2) − 

 Initial investment = Rs. 23000/-


 

YearDiscounted factorReturnsNet present value
10.92540003700
20.89248004281.6
30.74936002696.4
40.67154003623.4
50.60235002107


2130016408.4
 

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.

raja
Published on 25-Sep-2020 20:04:03
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