R(1+R) Rs. 8,000 x PVIF at 12% Rs. 8,000 x 3.0373 3 Rs. 24.298 2.10 NET PRESENT VALUE : Net Present Value (NPV) is the most suitable method used for evaluating the capital investment projects. Under this method, cash inflow and outflows associated with each project are worked out. The present value of cash inflows is calculated by discounting the cash flows at the rate of return acceptable to the management The cash outflows represent the investment and commitments of cash in the project at various points of time. It is generally determined on the basis of cost of captal suitably adjusted to allow for the risk element involved in the project. The working capital is taken as a cash outflow in the initial year. The cash Inflow represents the net profit after tax but before depreciation. A depreciation is a non-cash expenditure hence it is added back to the net profit after tax in order to determine the cash inflows. The Net Present Value of cash inflows and the present value of cash outflows. If the NPV is positive the project is accepted, and if it is negative, the project is rejected. Discounted cash flow is an evaluation of the future net cash flows generated by a project. This method considers the time value of money concept and hence it is considered better for evaluation of investment proposals. If these are mutually exclusive projects, this method is more useful. The Net Present Value is determined as follows: NPV = Present value of future cash inflows - Present value of cash outflows. Illustration 7: An investment of Rs. 40,000 made on 14/2002 provides inflows as follows: Date 01/04/03 01/04/04 01/04/05 01/04/06 Alternative 20.000 10.000 10.000 10.000 Alternative it 10.000 20.000 10,000 10.000 Which alternative would you prefer in the investor's expected return is 10%? Give reason(s) for your preference