Question

Read the following text and answer the question that follows. Show all calculations. tS M]
(Apd1 2013 News, PTI) in order to promote tourism around its salt lake Sambhar, Rajasthan's state gavemment, plans to spend an additional amount of Rs. 20
crore for the 2 financial years and another Rs. I crore for the following 2 financia! years. The regular operational cost of Rs. 48 !akhs per annum will remain (this
is separate from the fresh government funding mentioned above), Tourism revenue in this are now a£ Rs. 62 rakhi per annum and are expected to grow at a rate
of 20% per year for the next 4 years due to fresh investments. The additional fresh investments are given to tourism sector by state government via a soft loan
with 4% interest rate.

Use NPV to find out of if this is a profitable venture for the government (take time over the next 4 financial years from now).

Answer 1

The venture is not profitable if we evaluate it on the basis of NPV ( net present value )

Negetive NPV= 172•05 lakhs

( PV of inflows< pv of outflows)

Explanation-----

NPV= present value of inflows -- present value of outflows( taking discount rate @10)

# present value of inflows--------

74•4×3•1024=₹230•82 lakhs

(62 lakhs +20% of 62 lakhs= 74•4 lakhs)

Present value of ₹1 at 10% discount rate for 4 years-------

0•909,•826,•751,•683

Present value of an annuity @10% for four years= 3•1024

# present value of outflows---------:

* Annual operating cost = 48 lakhs× 3•1024= ₹148•92

* Interest payments@4%= 253•957 lakhs

( 20 crores×4%×3•1024)+(1 crore×4%ו751+1 crore×4%ו683)

Pv of total outflows= 402•87 lakhs

Pv of inflows = 230•82 lakhs

Npv= 230•82-- 402•87= -172•05

As ,it is negetive NPV, which means pv of outflows are greater than pv of inflows,venture must be rejected.