Question on NPV

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sapmmkamal
Posts: 19
Joined: Tue Aug 30, 2016 6:47 am

Question on NPV

Question 4

1.00/0.00
Hi,
Project -A
Duration-2 Years
Interest Rate-5%
PV-4.54MN
Future Discounted Value-40MN

Project-B
Duration-3 Years
Interest Rate-15%
PV-3.63MN
Future Discounted Value-45MN

Company CEO is using economic model criteria of selecting projects. He has two projects; project A and B tabled for today’s meeting and has to select one of them. Following are the details of the projects. Which project will he select

A. Project A

B.Project B

C.Both Project A and B are equally attractive

D. Information is not sufficient to reach conclusion
- Solution
You need to calculate Net Present Value as it is one of the economic model criteria. To calculate NPV you need to calculate present value of both income and cost and calculate NPV by subtracting present value of cost from present value of income, Since future discounted value of income is given which means present value only . Hence project B is should be selected.

----In this how Present Value of Cost will be calculated----
vikram_unde
Contributor
Posts: 182
Joined: Tue Aug 23, 2016 5:48 am

Re: Question on NPV

Hi Manish,

Could you please comment on this question. We understand Future discounted value is given, but for Project A it's for 2 years and for project B, it's for three years.

Don't we consider future value along with years?

Regards,
Vikram Unde
manishpn
Expert
Posts: 2589
Joined: Sat Jan 04, 2014 3:55 pm

Re: Question on NPV

when you calculate NPV the years is already taken into your calculation so it should not matter. what matters is what is the Net present value of the project as of today to be able to select best option.
Br,
Manish P
PMP, PMI - ACP, SAFe Agilist
http://www.izenbridge.com/blog/7-effect ... ification/
pdsg843
Posts: 1
Joined: Wed Mar 11, 2015 12:27 am

Re: Question on NPV

Can anyone please explain adding values in formula for this question. I am not able to confirm is I am calculating correct?

Project A: 40/1.10 = 36.36

Project B: 45/1.52 = 29.60

What next?
manishpn
Expert
Posts: 2589
Joined: Sat Jan 04, 2014 3:55 pm

Re: Question on NPV

Present value, also called "discounted value," is the current worth of a future sum of money or stream of cash flow given a specified rate of return
NPV is the difference in present value of income and cost
since no cost information if provided
NPV = PV
which is already provided, no maths is needed in this question
Br,
Manish P
PMP, PMI - ACP, SAFe Agilist
http://www.izenbridge.com/blog/7-effect ... ification/