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MB0047 : There are two investment plans in the market whose details are given below based on which you need to decide which investment plan you need to select. Suggest which investment plan you prefer and why?

Posted on: October 19, 2011

MB0047 : There are two investment plans in the market whose details are given below based on which you need to decide which investment plan you need to select. Suggest which investment plan you prefer and why?

Particulars

Plan A

Plan B

Investment in Rs. Million

3

2.7

Savings/ gain per year in Rs. Million

1.0

0.75

No. of years savings or gain would occur

5

5

Discount Rate

12%

12%

In above investment analysis, the Net Present Value (NPV) is calculated and compared with all the investment alternatives.

NPV = (PV of further Cash flow) – Investment = PV – 1

The formula used for the present value PV is:

Where T is a number of period, in which an amount S for each period is to be received and i is a discount rate.

Plan A

PV = 1.0   1- (1+0.12)-5        = 3.605 Therefore, NPV = 3.605 – 3 = 0.605

0.12

Plan B

PV = 0.75    1- (1+0.12)-5        = 2.704 Therefore, NPV = 2.704 – 2.7 = 0.004

0.12

From the above data: since Plan A has more NPV we should select plan A.

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