Less: Initial Investment Net Present Value 55,000 (-) 3 47 Analysis : The negative NPV is due to rounding of, otherwise it would be zero. Hence, it is indifferent to suggest or reject the proposal. Illustration 9: A company is considering a new project. The project would involve an initial investment of Rs. 1. 20,000 in equipment which would have a life of 5 years and no scrap value. The selling price now (year 0) would be Rs. 60 and is expected to increase in line with the retail price index. Sales are expected to be constant at 2000 units each year. The following estimates about unit costs are available: Cost at year 0 Price Rate of Increase Rs. Cost Element Wages Other Total 20 25 2% per annum faster than retail prices In line with retail prices 45 All transactions take place at yearly intervals on the last day of the year. No increase in working capital will be required. The following estimates of the rate of increase in retail prices and of interest rates are available: Year Rates of increase in retail prices% Interest rate% 1 15 16 2 20 20 3 22 4 40 20 5 30 18 25 Assuming Purchasing Power Parity Theorem hold in the present case, changes in interest rates will affect the money value. Hence Cost of Capital is taken in money terms