Net Present Value (NPV) and Internal Rate of Return (IRR)

Net Present Value (NPV) is the value of all future cash flows (positive and negative) over the entire life of an investment discounted to the present.

NPV = (Cash Flow / (1 + i) raised to t) – Initial Investment
i = Required return or discount rate
t = Number of time periods

Management / MBA questions on this topic:

Q) Mr. Rathi is about to retire. His employer offers him post-retirement benefits by way of the following two options:
a) A consolidated amount of Rs 15 lacs
b) An annual pension of Rs 3 lacs in the 1st year, Rs 4 lacs in the 2nd year, Rs 5 lacs in the 3rd year and Rs 6 lacs in the 4th year.
Which option should Mr. Rathi go for, assuming a discount rate of 10%?

Q) X Ltd has to replace its machine and the production manager has to decide between Machine A and Machine B. Machine A is having installation cost of 10,000 and annual electric bill 2000. Machine B has installation cost of 15,000 and annual electric bill of 1000. If both have life of 8 years which machine will you recommend if interest rate is 9 %.

Q) ABC Limited is looking at a Project D with following projected cash flows:
Year, Inflows / (outflow), P .V Factor @ 15%, P .V Factor @ 20%
0, (240,000), 1.000, 1.000
1, 25,000, 0.870, 0.833
2, 75,000, 0.756, 0.694
3, 150,000, 0.658, 0.579
4, 150,000, 0.572, 0.482

Calculate and interpret results

a. NPV at 15 % & 20% (5 Marks)
b. IRR (5

studymumbai

StudyMumbai.com is an educational resource for students, parents, and teachers, with special focus on Mumbai. Our staff includes educators with several years of experience. Our mission is to simplify learning and to provide free education. Read more about us.