Net Present Value (NPV) analysis is a method of calculating the expected net monetary gain or loss from a project by discounting all expected future cash inflow and outflow to the present point in time.
(a) What does negative and positive NPV indicate?
(b) In line with your company policy you are eligible for a loan to purchase a car. You have chosen a hybrid car which would cost you Rs 1,000,000.00. You assume that the car would be beneficial for you as you will also be given an allowance of Rs 20,000.00 per month. You will also manage to get Rs 5,000.00 per months by carrying some colleagues to work. You assume expenses of Rs 5,000.00 for petrol per month and Rs 40,000.00 per year for general expenses, including insurance, servicing and all associated cost.
(i) What is the payback period (to the nearest year) if you take the car?
(ii) Assuming your allowance will increase by Rs 18,000.00 per year, after the first year, and given that the loan repayment period is six years.
(I) What is the net cash flow for each year?
(II) At what rate of interest can you accept to take the loan from the company?
(iii) Give two criticism associated with NPV analysis.