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posted by  moon001 on 10/29/2009 8:50:29 AM  |  status: Closed  |  Earned Karma: 0

financial help plzz

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N/A N/A N/A N/A 10/30/2009 at 12:00:00 AM
Question Details:

you are requested to advise him which proposal he should prefer keeping in mind the NPV analysis. Support your decision with necessary calculation.

Proposal 1:

This proposal is for the period of 4 years i.e. 2009 to 2012 and the initial investment is Rs. 5000. Cash inflows are given below:

Year

Cash inflows (Rs.)

2009

2000

2010

3000

2011

4000

2012

3000

Proposal 2:

Other option is to invest Rs. 3000 in XYZ Corporation in the year 2009 which will provide him a steady cash inflow of Rs. 1000 for 4 years (year 2009-2012).

And the remaining Rs. 2000 in ABC Corporation in the year 2009 which will provide him a steady cash inflow of Rs. 2000 for 4 years (year 2009-2012).

Whereas, the commercial banks provide 10% return on PLS saving account.
Tags: Finance

AAnswers:

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(SME)
posted by devis on 10/30/2009 12:09:32 AM  |  status: Live
Asker's Rating: Lifesaver   
Response Details:
Calculating Net Present Values (NPV):
PROPOSAL - 1
Calculating Net Present Value (NPV):
Year
Cashflows
PV factor at 10%
Net Present Value
2009
($5,000)
1
($5,000.00)
2009
$2,000
0.9091
$1,818.20
2010
$3,000
0.8264
$2,479.20
2011
$4,000
0.7513
$3,005.20
2012
$3,000
0.6830
$2,049.00
Net Present Value
$4,351.60
PROPOSAL - 2
Calculating Net Present Value (NPV):
Year
Cashflows
PV factor at 10%
Net Present Value
2009
($3,000)
1
($3,000.00)
2009
$1,000
0.9091
$909.10
2010
$1,000
0.8264
$826.40
2011
$1,000
0.7513
$751.30
2012
$1,000
0.6830
$683.00
Net Present Value
$169.80
Year
Cashflows
PV factor at 10%
Net Present Value
2009
($2,000)
1
($2,000.00)
2009
$2,000
0.9091
$1,818.20
2010
$2,000
0.8264
$1,652.80
2011
$2,000
0.7513
$1,502.60
2012
$2,000
0.6830
$1,366.00
Net Present Value
$4,339.60
Total NPV = $169.80 + $4,339.60 = $4,509.40
Note: Proposal - 1 NPV = $4,351.60
          Proposal - 2 NPV = $4,509.40
         Comparing these two Proposals, Proposal - 2 has highest Net Present Value. Thus,he is better to preferr Proposal - 2.

 
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