If an investment opportunity came to you and you had to invest Rs. 20 lakhs (2 million) in a company. The company guaranteed you steady cash flow of Rs. 5 lakhs (500,000) every year over the next 5 years. Assuming discount rates of 15% should you make this investment?

if the discount rate is 5%-this is write ans

please expalin me once again

if the discount rate is 5%-this is write ans

please expalin me once again

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Nov 10 2012 07:24 PM

Yashodha. This question focuses on calculating NPV of an investment in the project.

Cash inflow is Rs.20 lakhs

Cash outflow is Rs. 5 lakhs every year for 5 years

Discount Rate is 15%

if you lay out these numbers is excel as -25,00,000, 5,00,000, 5,00,000, 5,00,000, 5,00,000, 5,00,000, and 15%. Then use the excel formula =NPV(rate,.......) you should be able to get the answer. Is the clear?

Nov 20 2012 10:50 AM
Cash inflow is Rs.20 lakhs

Cash outflow is Rs. 5 lakhs every year for 5 years

Discount Rate is 15%

if you lay out these numbers is excel as -25,00,000, 5,00,000, 5,00,000, 5,00,000, 5,00,000, 5,00,000, and 15%. Then use the excel formula =NPV(rate,.......) you should be able to get the answer. Is the clear?

You will notice that at 15% the NPV is negative indicating that it is a bad investment. At 5% you will notice that this project has a positive NPV and hence worth investing. The discount rate essentialy is a measure of how risky a project is.

Nov 20 2012 10:53 AM