Student ID: mc100403644

MGT201 Assignment 1

Option No.1
Purchase value of car as given in scenario = 12,00,000

Option No.2

Initial investment (-IO) = 400,000

Cash flow (CF) = (25000*12) Rs 300,000
Periodic interest rate (i) = 15%
Compounding cycle = 4 years

Formula
NPV = -IO +PV (CF1)+ PV (CF2)+ PV (CF3)+ PV (CF4)
Hence
PV (CFt) = CFt / (1 +i)^n
So
NPV = -IO + CF1 / (1+i) ^1 + CF2 / (1+i) ^2 + CF3 / (1+i) ^3 +CF4 / (1+i) ^4
Now putting the values:
NPV=400000+300000/(1+.15)^1+300000/(1+.15)^2+300000/(1+.15)^3+300000 /(1+.15)^4
NPV = 400000+300000/(1.15)^1+300000/(1.15)^2+300000/(1.15)^3+300000/(1.15)^4
NPV = 400000 +260869.57 + 226843.10 + 197254.87 + 171525.97
NPV = 1256493.51

Option no.3
Initial investment (-IO) = 400,000
Cash flow 1, 2 = 120000 (10000*12=120000)
Cash flow 2.5 = 300000
Cash flow 3 = 200000
Periodic interest rate (i) = 15%

NPV = -IO +PV (CF1)+ PV (CF2)+ PV (CF3)+ PV (CF4)

Hence
PV (CFt) = CFt / (1 +i)^n
So
NPV = -IO + CF1 / (1+i) ^1 + CF2 / (1+i) ^2 + CF3 / (1+i) ^3 +CF4 / (1+i) ^4
Now putting the values:
NPV = 400000+120000/(1+.15)^1+120000/(1+.15)^2+300000/(1+.15)^2.5+200000 /(1+.15)^3
NPV = 400000+120000/(1.15)^1+120000/(1.15)^2+300000/(1.15)^2.5+200000/(1.15)^3
NPV = 400000 + 104347.83 + 90737.24 + 211532.28 + 131503.25
NPV = 938120.60

Best option:
Option no.3 is the best option to choose for Mr.Amir. As it has lowest NPV.