MGT201 GDB

Solution of Financial Management GDB MGT201: Proposal 1:
NPV = -IO + Summation CFt/(1+i)^t
Putting the values in NPV formula:
-IO = -5,000CFt = cash inflows for 1st, 2nd,3rd and 4th years are 2000, 3000, 4000 and 3000 respectively.i = 10%t = 4
Putting the values in the above formula:
NPV = -5000 + [2000/(1+0.1) + 3000/(1+0.1)^2 + 4000/(1+0.1)^3 + 3000/(1+0.1)^4]
NPV = +4351 Rs.

Proposal 2:
(1) XYZ Corporation:
-IO = -3000CFt = 1000 for 4 yearsi = 10%t = 4
Putting the values in NPV formula:
NPV1 = -3000 + [1000/(1+0.1) + 1000/(1+0.1)^2 + 1000/(1+0.1)^3 + 1000/(1+0.1)^4]
NPV1 = 169 Rs.
(2) ABC Corporation:
-IO = -2000CFt = 2000 for 4 yearsi = 10%t = 4
NPV2 = -2000 + [2000/(1+0.1) + 2000/(1+0.1)^2 + 2000/(1+0.1)^3 + 2000/(1+0.1)^4]
NPV2 = 4340 Rs.
By adding NPV1 and NPV2, we'll get
NPV = NPV1 + NPV2 = 169 +NPV = +4509 Rs.
Since, NPV of proposal 2 is higher than proposal 1, so proposal 2 should be preferred.