The Textile Manufacturing Company Ltd. is considering one of two mutually exclusive proposals, Projects M and N, which require cash outlays of…

(i) Statement Showing the Net Present Value of Project M Year end Cash Flow (₹) (a) C.E. (b) Adjusted Cash flow (₹) (c) = (a) × (b) Present value factor at 6% (d) Total Present value (₹) (e) = (c) x (d) 1 9,00,000 0.8 7,20,000 0.943 6,78,960 2 10,00,000 0.7 7,00,000 0.890 6,23,000 3 10,00,000 0.5 5,00,000 0.840 4,20,000 Total 17,21,960 Less: Initial Investment 17,00,000 Net Present Value 21,960 Statement Showing the Net Present Value of Project N Year end Cash Flow (₹) (a) C.E. (b) Adjusted Cash flow (₹) (c) = (a) × (b) Present value factor (d) Total Present value (₹) (e) = (c) x (d) 1 9,00,000 0.9 8,10,000 0.943 7,63,830 2 9,00,000 0.8 7,20,000 0.890 6,40,800 3 10,00,000 0.7 7,00,000 0.840 5,88,000 Total 19,92,630 Less: Initial Investment 16,50,000 Net Present Value 3,42,630 Decision: Since the net present value of Project N is higher, so the project N should be accepted. (ii) Since Certainty - Equivalent (C.E.) Co-efficient of Project M (2.0) is lower than Project N (2.4), Project M is riskier than Project N and as "higher the riskiness of a cash flow, the lower will be the CE factor". Thus if risk adjusted discount rate (RADR) method is used, Project M would be analysed with a higher rate.