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BRILLIANT’S Analysis of Risk and Uncertainty in Investment Decisions 481

2 18,000 0.85 15,300 0.826 12,638
3 20,000 0.70 14,000 0.751 10,514
4 20,000 0.65 13,000 0.683 8,879

NPV (+) 14,984

Project 2.

Year Cashflow CE CF×CE PVF@10% PV
(`) (`) (`) (`) (`)

0 (40,000) 1 (40,000) 1.00 (40,000)
1 25,000 0.90 22,500 0.909 20,453
2 20,000 0.80 16,000 0.826 13,216
3 25,000 0.70 17,500 0.751 13,142
4 18,000 0.60 10,800 0.683 7,376
NPV (+) 14,187

Decision: Project 1 is showing a higher NPV as compared to Project 2. Hence, Project 1 is
recommended for adoption.
Illustration 5.2.6
A project costs ` 5,00,000 and the expected cash flows after tax (CFAT) for its 4 years life are:
EH$ àmoOo³Q> H$s bmJV ` 5,00,000 h¢ VWm Q>¡³g bmB’$ Ho$ níMmV² Ano{jV H¡$eâbmo (CFAT) {ZåZ h¢…

Year CFAT (`) Certainty equivalent coefficient
(df©) (gQ>©ÝQ>r Bp³ddob|Q> H$moB’$s{eE§Q>)

1 2,00,000 0.90
2 3,00,000 0.80
3 1,50,000 0.70
4 1,00,000 0.60

The riskless rate of return is 6%. / [aQ>Z© H$m [añH$bog aoQ> 6%> h¡&

Solution:
The certainty equivalent cash inflows would be:
Year 1 2,00,000 × 0.90 = ` 1,80,000
Year 2 3,00,000 × 0.80 = ` 2,40,000
Year 3 1,50,000 × 0.70 = ` 1,05,000
Year 4 1,00,000 × 0.60 = ` 60,000